FORM 20-F/A (AMENDMENT NO. 1)
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F/A

(Amendment No. 1)

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

or

 

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2012

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from/to

or

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report:

Commission file number 1-6439

Sony Kabushiki Kaisha

(Exact Name of Registrant as specified in its charter)

SONY CORPORATION

(Translation of Registrant’s name into English)

Japan

(Jurisdiction of incorporation or organization)

7-1, KONAN 1-CHOME, MINATO-KU,

TOKYO 108-0075 JAPAN

(Address of principal executive offices)

J. Justin Hill, Vice President, Investor Relations

Sony Corporation of America

550 Madison Avenue

New York, NY 10022

Telephone: 212-833-6722, Facsimile: 212-833-6938

(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

American Depositary Shares*   New York Stock Exchange
Common Stock**   New York Stock Exchange
* American Depositary Shares evidenced by American Depositary Receipts.
     Each American Depositary Share represents one share of Common Stock.
** No par value per share.
     Not for trading, but only in connection with the listing of American Depositary Shares pursuant to the requirements of the New York Stock Exchange.

Securities registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report:

 

     Outstanding as of  
     March 31, 2012      March 31, 2012  

Title of Class

   (Tokyo Time)      (New York Time)  

Common Stock

     1,004,638,164      

American Depositary Shares

        66,940,684   

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  þ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

þ  Large accelerated filer

   ¨  Accelerated filer    ¨  Non-accelerated filer

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

US GAAP  þ

   International Financial Reporting Standards as issued by the International Accounting Standards Board  ¨    Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 

Item 17  ¨

      Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  ¨

      No  þ

 

 

 


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Explanatory Note

Sony Corporation (“Sony”) is filing this Amendment No. 1 on Form 20-F/A (the “Form 20-F/A”) to amend its annual report on Form 20-F for the fiscal year ended March 31, 2012 (the “2011 Form 20-F”) as originally filed with the Securities and Exchange Commission (the “SEC”) on June 27, 2012. The Report of Independent Registered Public Accounting Firm in the Consolidated Financial Statements (the “Report”), as submitted to the SEC by Sony on a Form 6-K on June 1, 2012, was erroneously attached to the 2011 Form 20-F under Item 8. The Report attached to the 2011 Form 20-F did not include an opinion on the financial statement schedule (the “Schedule”), presented on page F-101 in the 2011 Form 20-F. This amendment replaces that Report with the correct version of the Report referring to the above mentioned Schedule and presents Item 8 of the 2011 Form 20-F with the correct version of the Report as page F-2. This amendment does not contain any changes to data and footnotes in the Consolidated Financial Statements of Sony Corporation and its consolidated subsidiaries, presented on pages F-3 through F-101 or the data and footnotes in the Consolidated Financial Statements of Sony Mobile Communications AB on pages A-1 through A-30 of the 2011 Form 20-F.

Other than as expressly set forth above, this Form 20-F/A does not, and does not purport to, revise, update, amend or restate the information presented in any Item of the 2011 Form 20-F or reflect any events that have occurred after the filing of the 2011 Form 20-F.


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Item 8. Financial Information

 

A. Consolidated Statements and Other Financial Information.

Refer to the consolidated financial statements and the notes to the consolidated financial statements.

Legal Proceedings

In May 2011, Sony Corporation’s U.S. subsidiary, Sony Electronics Inc., received a subpoena from the U.S. Department of Justice (“DOJ”) Antitrust Division seeking information about its secondary batteries business. Sony understands that the DOJ and agencies outside the United States are investigating competition in the secondary batteries market. Based on the stage of the proceedings, it is not possible to estimate the amount of loss or range of possible loss, if any, that might result from adverse judgments, settlements or other resolution of this matter.

Beginning in early 2011, the network services of PlayStation®Network, Qriocity™, Sony Online Entertainment LLC and websites of other subsidiaries came under cyber-attack. As of June 27, 2012, Sony has not received any confirmed reports of customer identity theft issues or misuse of credit cards from such cyber-attacks. However, in connection with certain of these matters, Sony has received inquiries from authorities in a number of jurisdictions, including orders for reports issued by the Ministry of Economy, Trade and Industry of Japan as well as the Financial Services Agency of Japan, formal and/or informal requests for information from Attorneys General from a number of states in the United States and the U.S. Federal Trade Commission, various U.S. congressional inquiries and others. Additionally, Sony Corporation and/or certain of its subsidiaries have been named in a number of purported class actions in certain jurisdictions, including the United States. Based on the stage of these inquiries and proceedings, it is not possible to estimate the amount of loss or range of possible loss, if any, that might result from adverse judgments, settlements or other resolution of all of these matters.

In October 2009, Sony Corporation’s U.S. subsidiary, Sony Optiarc America Inc., received a subpoena from the DOJ seeking information about its optical disk drive business. Sony understands that the DOJ and agencies outside the United States are investigating competition in optical disk drives. Subsequently, a number of purported class action lawsuits were filed in certain jurisdictions, including the United States, in which the plaintiffs allege that Sony Corporation and certain of its subsidiaries violated antitrust laws and seek recovery of damages and other remedies. Based on the stage of these proceedings, it is not possible to estimate the amount of loss or range of possible loss, if any, that might result from adverse judgments, settlements or other resolution of these matters.

In addition, Sony Corporation and certain of its subsidiaries are defendants or otherwise involved in other pending legal and regulatory proceedings. However, based upon the information currently available, Sony believes that the outcome from such legal and regulatory proceedings would not have a material effect on Sony’s consolidated financial statements.

Dividend Policy

Sony believes that continuously increasing corporate value and providing dividends are essential to rewarding shareholders. It is Sony’s policy to utilize retained earnings, after ensuring the perpetuation of stable dividends, to carry out various investments that contribute to an increase in corporate value such as those that ensure future growth and strengthen competitiveness.

A fiscal year-end dividend of 12.5 yen per share of Common Stock of Sony Corporation was approved at the Board of Directors meeting held on May 9, 2012 and the payment of such dividend started on June 6, 2012. Sony Corporation has already paid an interim dividend for Common Stock of 12.5 yen per share to each shareholder; accordingly, the total annual dividend per share of Common Stock for the fiscal year ended March 31, 2012 is 25.0 yen.

 

B. Significant Changes

No significant change has occurred since the date of the annual financial statements included in this annual report.


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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

 

     Page  

Report of Independent Registered Public Accounting Firm

     F-2   

Consolidated Balance Sheet at March 31, 2011 and 2012

     F-4   

Consolidated Statements of Income for the fiscal years ended March 31, 2010, 2011 and 2012

     F-6   

Consolidated Statements of Cash Flows for the fiscal years ended March 31, 2010, 2011 and 2012

     F-8   

Consolidated Statements of Changes in Stockholders’ Equity for the fiscal years ended March 31, 2010, 2011 and 2012

     F-10   

Index to Notes to Consolidated Financial Statements

     F-13   

Notes to Consolidated Financial Statements

     F-14   

Financial Statement Schedule II for the fiscal years ended March 31, 2010, 2011 and 2012 — Valuation and Qualifying Accounts

     F-101   

************************************************************************

 

Consolidated Financial Statements of Sony Mobile Communications AB

     A-1   

Report of Independent Auditors

     A-30   

Consolidated Financial Statements of Sony Mobile Communications AB are provided pursuant to Regulation S-X Rule 3-09.

 

F-1


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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Sony

Corporation (Sony Kabushiki Kaisha)

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Sony Corporation and its subsidiaries (the “Company”) at March 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2012, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 15(b). Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As described in Management’s Annual Report on Internal Control over Financial Reporting, management has excluded Sony Mobile Communications AB from its assessment of internal control over financial reporting as of March 31, 2012, because it was acquired by the Company in a purchase business combination during the year ended March 31, 2012. We have also excluded Sony Mobile Communications AB from our audit of internal control over financial reporting. Sony Mobile Communications AB is a wholly-owned subsidiary whose total assets and total sales and operating revenue represent 347.0 billion yen and 77.7 billion yen, respectively, of the related consolidated financial statement amounts as of and for the year ended March 31, 2012.

/s/ PricewaterhouseCoopers Aarata

Tokyo, Japan

May 31, 2012

 

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Balance Sheets

 

 

March 31

 

     Yen in millions  
      2011     2012  

ASSETS

    

Current assets:

    

Cash and cash equivalents

     1,014,412        894,576   

Marketable securities

     646,171        680,913   

Notes and accounts receivable, trade

     834,221        840,924   

Allowance for doubtful accounts and sales returns

     (90,531     (71,009

Inventories

     704,043        707,052   

Other receivables

     215,181        202,044   

Deferred income taxes

     133,059        36,769   

Prepaid expenses and other current assets

     387,490        463,693   

Total current assets

     3,844,046        3,754,962   

Film costs

     275,389        270,048   

Investments and advances:

    

Affiliated companies

     221,993        36,800   

Securities investments and other

     5,670,662        6,282,676   
       5,892,655        6,319,476   

Property, plant and equipment:

    

Land

     145,968        139,413   

Buildings

     868,615        817,730   

Machinery and equipment

     2,016,956        1,957,134   

Construction in progress

     53,219        35,648   
     3,084,758        2,949,925   

Less — Accumulated depreciation

     2,159,890        2,018,927   
       924,868        930,998   

Other assets:

    

Intangibles, net

     391,122        503,699   

Goodwill

     469,005        576,758   

Deferred insurance acquisition costs

     428,262        441,236   

Deferred income taxes

     300,702        100,460   

Other

     385,073        398,030   
       1,974,164        2,020,183   

Total assets

     12,911,122        13,295,667   
                  

 

(Continued on following page.)

 

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

 

Consolidated Balance Sheets (Continued)

 

 

 

     Yen in millions  
      2011     2012  

LIABILITIES

    

Current liabilities:

    

Short-term borrowings

     53,737        99,878   

Current portion of long-term debt

     109,614        310,483   

Notes and accounts payable, trade

     793,275        758,680   

Accounts payable, other and accrued expenses

     1,013,037        1,073,241   

Accrued income and other taxes

     87,396        63,396   

Deposits from customers in the banking business

     1,647,752        1,761,137   

Other

     430,488        463,166   

Total current liabilities

     4,135,299        4,529,981   

Long-term debt

     812,235        762,226   

Accrued pension and severance costs

     271,320        309,375   

Deferred income taxes

     306,227        284,499   

Future insurance policy benefits and other

     2,924,121        3,208,843   

Policyholders’ account in the life insurance business

     1,301,252        1,449,644   

Other

     204,766        240,978   

Total liabilities

     9,955,220        10,785,546   

Redeemable noncontrolling interest

     19,323        20,014   

Commitments and contingent liabilities

                

EQUITY

                

Sony Corporation’s stockholders’ equity:

    

Common stock, no par value —

    

2011 — Shares authorized: 3,600,000,000, shares issued: 1,004,636,664

     630,921     

2012 — Shares authorized: 3,600,000,000, shares issued: 1,004,638,164

       630,923   

Additional paid-in capital

     1,159,666        1,160,236   

Retained earnings

     1,566,274        1,084,462   

Accumulated other comprehensive income —

    

Unrealized gains on securities, net

     50,336        64,882   

Unrealized losses on derivative instruments, net

     (1,589     (1,050

Pension liability adjustment

     (152,165     (186,833

Foreign currency translation adjustments

     (700,786     (719,092
     (804,204     (842,093

Treasury stock, at cost

    

Common stock

    

2011 — 1,051,588 shares

     (4,670  

2012 — 1,061,803 shares

       (4,637
       2,547,987        2,028,891   

Noncontrolling interests

     388,592        461,216   

Total equity

     2,936,579        2,490,107   

Total liabilities and equity

     12,911,122        13,295,667   
                  

The accompanying notes are an integral part of these statements.

 

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Income

 

 

Fiscal year ended March 31

 

     Yen in millions  
      2010     2011     2012  

Sales and operating revenue:

      

Net sales

     6,293,005        6,304,401        5,526,611   

Financial services revenue

     838,300        798,495        868,971   

Other operating revenue

     82,693        78,377        97,630   
       7,213,998        7,181,273        6,493,212   

Costs and expenses:

      

Cost of sales

     4,892,563        4,831,363        4,386,447   

Selling, general and administrative

     1,544,890        1,501,813        1,375,887   

Financial services expenses

     671,550        675,788        736,050   

Other operating (income) expense, net

     42,988        (13,450     (59,594
       7,151,991        6,995,514        6,438,790   

Equity in net income (loss) of affiliated companies

     (30,235     14,062        (121,697

Operating income (loss)

     31,772        199,821        (67,275

Other income:

      

Interest and dividends

     13,191        11,783        15,101   

Gain on sale of securities investments, net

     9,953        14,325        671   

Foreign exchange gain, net

            9,297          

Other

     20,690        9,561        7,706   
       43,834        44,966        23,478   

Other expenses:

      

Interest

     22,505        23,909        23,432   

Loss on devaluation of securities investments

     2,946        7,669        3,604   

Foreign exchange loss, net

     10,876               5,089   

Other

     12,367        8,196        7,264   
       48,694        39,774        39,389   

Income (loss) before income taxes

     26,912        205,013        (83,186

Income taxes:

      

Current

     79,120        117,918        108,545   

Deferred

     (65,162     307,421        206,694   
       13,958        425,339        315,239   

Net income (loss)

     12,954        (220,326     (398,425

Less — Net income attributable to noncontrolling interests

     53,756        39,259        58,235   

Net loss attributable to Sony Corporation’s stockholders

     (40,802     (259,585     (456,660
                          

 

(Continued on following page.)

 

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

 

Consolidated Statements of Income (Continued)

 

 

 

     Yen  
      2010     2011     2012  

Per share data:

      

Common stock

      

Net loss attributable to Sony Corporation’s stockholders

      

— Basic

     (40.66     (258.66     (455.03

— Diluted

     (40.66     (258.66     (455.03

Cash dividends

     25.00        25.00        25.00   

The accompanying notes are an integral part of these statements.

 

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Cash Flows

 

 

Fiscal year ended March 31

 

     Yen in millions  
      2010     2011     2012  

Cash flows from operating activities:

      

Net income (loss)

     12,954        (220,326     (398,425

Adjustments to reconcile net income (loss) to net cash provided by operating activities —

      

Depreciation and amortization, including amortization of deferred insurance acquisition costs

     371,004        325,366        319,594   

Amortization of film costs

     277,665        250,192        188,836   

Stock-based compensation expense

     2,202        1,952        1,952   

Accrual for pension and severance costs, less payments

     (9,763     (15,229     36,647   

Other operating (income) expense, net

     42,988        (13,450     (59,594

(Gain) loss on sale or devaluation of securities investments, net

     (7,007     (6,656     2,933   

(Gain) loss on revaluation of marketable securities held in the financial services business for trading purposes, net

     (49,837     10,958        (21,080

(Gain) loss on revaluation or impairment of securities investments held in the financial services business, net

     (53,984     5,080        2,819   

Deferred income taxes

     (65,162     307,421        206,694   

Equity in net (income) loss of affiliated companies, net of dividends

     36,183        (11,479     138,772   

Changes in assets and liabilities:

      

(Increase) decrease in notes and accounts receivable, trade

     (53,306     104,515        4,427   

(Increase) decrease in inventories

     148,584        (112,089     29,778   

Increase in film costs

     (296,819     (244,063     (186,783

Increase (decrease) in notes and accounts payable, trade

     262,032        (18,119     (59,410

Increase (decrease) in accrued income and other taxes

     71,939        (8,020     (44,635

Increase in future insurance policy benefits and other

     284,972        278,897        332,728   

Increase in deferred insurance acquisition costs

     (71,999     (69,196     (68,634

Increase in marketable securities held in the financial services business for trading purposes

     (8,335     (30,102     (39,161

Increase in other current assets

     (32,405     (89,473     (35,181

Increase in other current liabilities

     5,321        56,076        10,595   

Other

     45,680        113,990        156,667   

Net cash provided by operating activities

     912,907        616,245        519,539   

 

(Continued on following page.)

 

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

 

Consolidated Statements of Cash Flows (Continued)

 

 

 

     Yen in millions  
      2010     2011     2012  

Cash flows from investing activities:

      

Payments for purchases of fixed assets

     (338,050     (253,688     (382,549

Proceeds from sales of fixed assets

     15,671        18,743        22,661   

Payments for investments and advances by financial services business

     (1,581,841     (1,458,912     (1,028,150

Payments for investments and advances (other than financial services business)

     (41,838     (15,316     (28,021

Proceeds from sales or return of investments and collections of advances by financial services business

     1,128,500        874,031        474,466   

Proceeds from sales or return of investments and collections of advances (other than financial services business)

     54,324        30,332        93,165   

Proceeds from sales of businesses

     22,084        99,335        8,430   

Payment for Sony Ericsson acquisition, net of cash acquired

                   (71,843

Other

     (4,854     (8,964     28,955   

Net cash used in investing activities

     (746,004     (714,439     (882,886

Cash flows from financing activities:

      

Proceeds from issuance of long-term debt

     510,128        1,499        216,887   

Payments of long-term debt

     (144,105     (216,212     (112,043

Increase (decrease) in short-term borrowings, net

     (250,252     6,120        (26,158

Increase in deposits from customers in the financial services business, net

     276,454        229,327        211,597   

Dividends paid

     (25,085     (25,098     (25,078

Other

     (2,126     (5,748     (7,869

Net cash provided by (used in) financing activities

     365,014        (10,112     257,336   

Effect of exchange rate changes on cash and cash equivalents

     (1,098     (68,890     (13,825

Net increase (decrease) in cash and cash equivalents

     530,819        (177,196     (119,836

Cash and cash equivalents at beginning of the fiscal year

     660,789        1,191,608        1,014,412   

Cash and cash equivalents at end of the fiscal year

     1,191,608        1,014,412        894,576   

Supplemental data:

      

Cash paid during the fiscal year for —

      

Income taxes

     60,022        116,376        127,643   

Interest

     19,821        20,583        20,276   

Non-cash investing and financing activities —

      

Obtaining assets by entering into capital leases

     2,553        3,738        56,403   

Collections of deferred proceeds from sales of receivables —

            153,550        132,636   

The accompanying notes are an integral part of these statements.

 

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Consolidated Statements of Changes in Stockholders’ Equity

 

 

 

    Yen in millions  
     Common
stock
    Additional
paid-in
capital
    Retained
earnings
    Accumulated
other
comprehensive
income
    Treasury
stock, at
cost
    Sony
Corporation’s
stockholders’
equity
    Noncontrolling
interests
    Total equity  

Balance at March 31, 2009

    630,765        1,155,034        1,916,951        (733,443     (4,654     2,964,653        251,949        3,216,602   

Exercise of stock acquisition rights

    57        57              114        6        120   

Stock-based compensation

      2,174              2,174          2,174   

Comprehensive income:

               

Net income (loss)

        (40,802         (40,802     53,756        12,954   

Other comprehensive income, net of tax —

               

Unrealized gains on securities

          32,267          32,267        16,527        48,794   

Unrealized gains on derivative instruments

          1,548          1,548        2        1,550   

Pension liability adjustment

          23,720          23,720        (27     23,693   

Foreign currency translation adjustments

          6,850          6,850        (343     6,507   
           

 

 

 

Total comprehensive income

              23,583        69,915        93,498   
           

 

 

 

Dividends declared

        (25,088         (25,088     (5,399     (30,487

Purchase of treasury stock

            (139     (139       (139

Reissuance of treasury stock

        (57       118        61          61   

Transactions with noncontrolling interests shareholders and other

      547              547        3,179        3,726   

 

 

Balance at March 31, 2010

    630,822        1,157,812        1,851,004        (669,058     (4,675     2,965,905        319,650        3,285,555   

 

 

 

(Continued on following page.)

 

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Consolidated Statements of Changes in Stockholders’ Equity (Continued)

 

 

 

    Yen in millions  
     Common
stock
    Additional
paid-in
capital
    Retained
earnings
    Accumulated
other
comprehensive
income
    Treasury
stock, at
cost
    Sony
Corporation’s
stockholders’
equity
    Noncontrolling
interests
    Total equity  

Balance at March 31, 2010

    630,822        1,157,812        1,851,004        (669,058     (4,675     2,965,905        319,650        3,285,555   

Exercise of stock acquisition rights

    99        99              198        22        220   

Stock-based compensation

      1,782              1,782          1,782   

Comprehensive income:

               

Net income (loss)

        (259,585         (259,585     39,259        (220,326

Other comprehensive income, net of tax —

               

Unrealized losses on securities

          (12,001       (12,001     (3,516     (15,517

Unrealized losses on derivative instruments

          (1,553       (1,553       (1,553

Pension liability adjustment

          (3,176       (3,176     (123     (3,299

Foreign currency translation adjustments

          (118,416       (118,416     (616     (119,032
           

 

 

 

Total comprehensive income (loss)

              (394,731     35,004        (359,727
           

 

 

 

Stock issue costs, net of tax

        (8         (8       (8

Dividends declared

        (25,089         (25,089     (6,599     (31,688

Purchase of treasury stock

            (111     (111       (111

Reissuance of treasury stock

        (48       116        68          68   

Transactions with noncontrolling interests shareholders and other

      (27           (27     40,515        40,488   

 

 

Balance at March 31, 2011

    630,921        1,159,666        1,566,274        (804,204     (4,670     2,547,987        388,592        2,936,579   

 

 

 

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Consolidated Statements of Changes in Stockholders’ Equity (Continued)

 

 

 

    Yen in millions  
     Common
stock
    Additional
paid-in
capital
    Retained
earnings
    Accumulated
other
comprehensive
income
    Treasury
stock, at
cost
    Sony
Corporation’s
stockholders’
equity
    Noncontrolling
interests
    Total equity  

Balance at March 31, 2011

    630,921        1,159,666        1,566,274        (804,204     (4,670     2,547,987        388,592        2,936,579   

Exercise of stock acquisition rights

    2        2              4        165        169   

Stock-based compensation

      1,838              1,838          1,838   

Comprehensive income:

               

Net income (loss)

        (456,660         (456,660     58,235        (398,425

Other comprehensive income, net of tax —

               

Unrealized gains on securities

          14,546          14,546        6,011        20,557   

Unrealized gains on derivative instruments

          539          539          539   

Pension liability adjustment

          (34,668       (34,668     1,495        (33,173

Foreign currency translation adjustments

          (18,306       (18,306     395        (17,911
           

 

 

 

Total comprehensive income (loss)

              (494,549     66,136        (428,413
           

 

 

 

Stock issue costs, net of tax

        (1         (1       (1

Dividends declared

        (25,090         (25,090     (7,760     (32,850

Purchase of treasury stock

            (79     (79       (79

Reissuance of treasury stock

        (61       112        51          51   

Transactions with noncontrolling interests shareholders and other

      (1,270           (1,270     14,083        12,813   

 

 

Balance at March 31, 2012

    630,923        1,160,236        1,084,462        (842,093     (4,637     2,028,891        461,216        2,490,107   

 

 

The accompanying notes are an integral part of these statements.

 

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Index to Notes to Consolidated Financial Statements

 

 

Sony Corporation and Consolidated Subsidiaries

 

     Page

 

Notes to Consolidated Financial Statements

  
  1.       Nature of operations    F-14
  2.       Summary of significant accounting policies    F-14
  3.       Inventories    F-27
  4.       Film costs    F-27
  5.       Related party transactions    F-28
  6.       Transfer of financial assets    F-31
  7.       Marketable securities and securities investments    F-33
  8.       Leased assets    F-35
  9.       Goodwill and intangible assets    F-37
  10.       Insurance-related accounts    F-39
  11.       Short-term borrowings and long-term debt    F-41
  12.       Housing loans and deposits from customers in the banking business    F-42
  13.       Fair value measurements    F-43
  14.       Derivative instruments and hedging activities    F-49
  15.       Pension and severance plans    F-53
  16.       Stockholders’ equity    F-62
  17.       Stock-based compensation plans    F-65
  18.       Great East Japan Earthquake and Thai Floods    F-67
  19.       Restructuring charges and asset impairments    F-68
  20.       Supplemental consolidated statements of income information    F-74
  21.       Income taxes    F-75
  22.       Reconciliation of the differences between basic and diluted EPS    F-80
  23.       Variable interest entities    F-80
  24.       Acquisitions    F-83
  25.       Divestitures    F-90
  26.       Collaborative arrangements    F-91
  27.       Commitments, contingent liabilities and other    F-91
  28.       Business segment information    F-94

 

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Notes to Consolidated Financial Statements

 

 

Sony Corporation and Consolidated Subsidiaries

 

1. Nature of operations

Sony Corporation and its consolidated subsidiaries (hereinafter collectively referred to as “Sony”) are engaged in the development, design, manufacture, and sale of various kinds of electronic equipment, instruments, and devices for consumer, professional and industrial markets as well as game consoles and software. Sony’s primary manufacturing facilities are located in Asia including Japan. Sony also utilizes third-party contract manufacturers for certain products. Sony’s products are marketed throughout the world by sales subsidiaries and unaffiliated distributors as well as direct sales via the Internet. Sony is engaged in the development, production and acquisition, manufacture, marketing, distribution and broadcasting of image-based software, including motion picture, home entertainment and television products. Sony is also engaged in the development, production, manufacture, and distribution of recorded music. Further, Sony is also engaged in various financial services businesses, including life and non-life insurance operations through its Japanese insurance subsidiaries and banking operations through a Japanese Internet-based banking subsidiary. In addition to the above, Sony is engaged in a network services business and an advertising agency business in Japan.

 

2. Summary of significant accounting policies

The accompanying consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain adjustments and reclassifications have been incorporated in the accompanying consolidated financial statements to conform with U.S. GAAP. These adjustments were not recorded in the statutory books and records as Sony Corporation and its subsidiaries in Japan maintain their records and prepare their statutory financial statements in accordance with accounting principles generally accepted in Japan while its foreign subsidiaries maintain their records and prepare their financial statements in conformity with accounting principles generally accepted in the countries of their domiciles.

 

(1) Significant accounting policies:

Basis of consolidation and accounting for investments in affiliated companies -

The consolidated financial statements include the accounts of Sony Corporation and its majority-owned subsidiary companies, general partnerships and other entities in which Sony has a controlling interest, and variable interest entities for which Sony is the primary beneficiary. All intercompany transactions and accounts are eliminated. Investments in business entities in which Sony does not have control, but has the ability to exercise significant influence over operating and financial policies, generally through 20-50% ownership, are accounted for under the equity method. In addition, investments in general partnerships in which Sony does not have a controlling interest and limited partnerships are also accounted for under the equity method if more than minor influence over the operation of the investee exists (generally through more than 3-5% ownership). When the interest in the partnership is so minor that Sony has no significant influence over the operation of the investee, the cost method is used. Under the equity method, investments are stated at cost plus/minus Sony’s portion of equity in undistributed earnings or losses. Sony’s equity in current earnings or losses of such entities is reported net of income taxes and is included in operating income (loss) after the elimination of unrealized intercompany profits. If the value of an investment has declined and is judged to be other-than-temporary, the investment is written down to its estimated fair value.

On occasion, a consolidated subsidiary or an affiliated company accounted for by the equity method may issue its shares to third parties in either a public or private offering or upon conversion of convertible debt to common stock at amounts per share in excess of or less than Sony’s average per share carrying value. With respect to such transactions, the resulting gains or losses arising from the change in interest are recorded in

 

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earnings for the year the change in interest transaction occurs, while a change in interest of a consolidated subsidiary that does not result in a change in control is accounted for as a capital transaction and no gains or losses are recorded in earnings.

The excess of the cost over the underlying net equity of investments in consolidated subsidiaries and affiliated companies accounted for on an equity basis is allocated to identifiable tangible and intangible assets and liabilities based on fair values at the date of acquisition. The unassigned residual value of the excess of the cost over Sony’s underlying net equity is recognized as goodwill as a component of the investment balance.

Use of estimates -

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates include those used in determining the valuation of investment securities, valuation of inventories, fair values of long-lived assets, fair values of goodwill, intangible assets and assets and liabilities assumed in business combinations, product warranty liability, pension and severance plans, valuation of deferred tax assets, uncertain tax positions, film costs, and insurance related liabilities. Actual results could differ from those estimates.

Translation of foreign currencies -

All asset and liability accounts of foreign subsidiaries and affiliates are translated into Japanese yen at appropriate fiscal year end current exchange rates and all income and expense accounts are translated at exchange rates that approximate those rates prevailing at the time of the transactions. The resulting translation adjustments are accumulated as a component of accumulated other comprehensive income. Upon remeasurement of a previously held equity interest in accordance with the accounting guidance for business combinations achieved in stages, accumulated translation adjustments, if any, remain as a component of accumulated other comprehensive income as there has not been sale or complete or substantially complete liquidation of the net investment.

Receivables and payables denominated in foreign currencies are translated at appropriate fiscal year end exchange rates and the resulting translation gains or losses are taken into income.

Cash and cash equivalents -

Cash and cash equivalents include all highly liquid investments, with original maturities of three months or less, that are readily convertible to known amounts of cash and are so near maturity that they present insignificant risk of changes in value because of changes in interest rates.

Marketable debt and equity securities -

Debt and equity securities designated as available-for-sale, whose fair values are readily determinable, are carried at fair value with unrealized gains or losses included as a component of accumulated other comprehensive income, net of applicable taxes. Debt and equity securities classified as trading securities are carried at fair value with unrealized gains or losses included in income. Debt securities that are expected to be held-to-maturity are carried at amortized cost. Individual securities classified as either available-for-sale or held-to-maturity are reduced to fair value by a charge to income for other-than-temporary declines in fair value. Realized gains and losses are determined on the average cost method and are reflected in income.

Sony regularly evaluates its investment portfolio to identify other-than-temporary impairments of individual securities. Factors that are considered by Sony in determining whether an other-than-temporary decline in value has occurred include: the length of time and extent to which the market value of the security has been less than

 

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its original cost, the financial condition, operating results, business plans and estimated future cash flows of the issuer of the security, other specific factors affecting the market value, deterioration of the credit condition of the issuers, sovereign risk, and whether or not Sony is able to retain the investment for a period of time sufficient to allow for the anticipated recovery in market value.

In evaluating the factors for available-for-sale securities whose fair values are readily determinable, Sony presumes a decline in value to be other-than-temporary if the fair value of the security is 20 percent or more below its original cost for an extended period of time (generally for a period of up to six months). This criterion is employed as a threshold to identify securities which may have a decline in value that is other-than-temporary. The presumption of an other-than-temporary impairment in such cases may be overcome if there is evidence to support that the decline is temporary in nature due to the existence of other factors which overcome the duration or magnitude of the decline. On the other hand, there may be cases where impairment losses are recognized when the decline in the fair value of the security is not more than 20 percent or such decline has not existed for an extended period of time, as a result of considering specific factors which may indicate the decline in the fair value is other-than-temporary.

When an other-than-temporary impairment of a debt security has occurred, the amount of the other-than-temporary impairment recognized in income depends on whether Sony intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost. If the debt security meets either of these two criteria, the other-than-temporary impairment is recognized in income, measured as the entire difference between the security’s amortized cost and its fair value at the impairment measurement date. For other-than-temporary impairments of debt securities that do not meet these two criteria, the net amount recognized in income is a credit loss equal to the difference between the amortized cost of the debt security and its net present value calculated by discounting Sony’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment. Any difference between the fair value and the net present value of the debt security at the impairment measurement date is recorded in accumulated other comprehensive income. Unrealized gains or losses on securities for which an other-than-temporary impairment has been recognized in income are presented as a separate component of accumulated other comprehensive income.

Equity securities in non-public companies -

Equity securities in non-public companies are primarily carried at cost if fair value is not readily determinable. If the carrying value of a non-public equity investment is estimated to have declined and such decline is judged to be other-than-temporary, Sony recognizes the impairment of the investment and the carrying value is reduced to its fair value. Determination of impairment is based on the consideration of several factors, including operating results, business plans and estimated future cash flows. Fair value is determined through the use of various methodologies such as discounted cash flows, valuation of recent financings and comparable valuations of similar companies.

Allowance for doubtful accounts -

Sony maintains an allowance for doubtful accounts to reserve for potentially uncollectible receivables. Sony reviews accounts receivable by amounts due by customers which are past due to identify specific customers with known disputes or collectability issues. In determining the amount of the reserve, Sony makes judgments about the creditworthiness of customers based on past collection experience and ongoing credit risk evaluations.

Inventories -

Inventories in the Consumer Products & Services, Professional, Device & Solutions and Music segments as well as non-film inventories for the Pictures segment are valued at cost, not in excess of market, cost being determined on the “average cost” basis except for the cost of finished products carried by certain subsidiary

 

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companies which is determined on the “first-in, first-out” basis, including the inventories in the Sony Mobile Communications segment. The market value of inventory is determined as the net realizable value - i.e., estimated selling price in the ordinary course of business less predictable costs of completion and disposal. Sony does not consider a normal profit margin when calculating the net realizable value.

Other receivables -

Other receivables include receivables which relate to arrangements with certain component manufacturers whereby Sony procures goods, including product components, for these component manufacturers and is reimbursed for the related purchases. No revenue or profit is recognized on these transfers. Sony usually will repurchase the inventory at a later date from the component manufacturers as either finished goods inventory or as partially assembled product.

Film costs -

Film costs include direct production costs, production overhead and acquisition costs for both motion picture and television productions and are stated at the lower of unamortized cost or estimated fair value and classified as noncurrent assets. Film costs are amortized and the estimated liabilities for residuals and participations are accrued using an individual-film-forecast method based on the ratio of current period actual revenues to the estimated remaining total revenues. Film costs also include broadcasting rights which consist of acquired programming to be aired on Sony’s worldwide channel network and are recognized when the license period begins and the program is available for use. Broadcasting rights are stated at the lower of unamortized cost or net realizable value, classified as either current or noncurrent assets based on timing of expected use, and amortized based on estimated usage or on a straight-line basis over the useful life, as appropriate. Estimates used in calculating the fair value of the film costs and the net realizable value of the broadcasting rights are based upon assumptions about future demand and market conditions and are reviewed on a periodic basis.

Property, plant and equipment and depreciation -

Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment is computed on the declining-balance method for Sony Corporation and its Japanese subsidiaries, except for certain semiconductor manufacturing facilities and buildings whose depreciation is computed on the straight-line method over the estimated useful life of the assets. Depreciation of property, plant and equipment for foreign subsidiaries is also computed on the straight-line method. Useful lives for depreciation range from two to 50 years for buildings and from two to 10 years for machinery and equipment. Significant renewals and additions are capitalized at cost. Maintenance and repairs, and minor renewals and betterments are charged to income as incurred.

Goodwill and other intangible assets -

Goodwill and certain other intangible assets that are determined to have an indefinite useful life are not amortized and are tested annually for impairment during the fourth quarter of the fiscal year and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. Goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. Reporting units are Sony’s operating segments or one level below the operating segments. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is not performed. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is

 

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recognized in an amount equal to that excess. Fair value of reporting units and indefinite lived intangible assets is generally determined using a discounted cash flow analysis. This approach uses significant estimates and assumptions including projected future cash flows, the timing of such cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth rates, determination of appropriate comparable entities and the determination of whether a premium or discount should be applied to comparables. In addition to the estimates of future cash flows, two of the most significant estimates involved in the determination of fair value of the reporting units are the discount rates and perpetual growth rate applied to terminal values used in the discounted cash flow analysis. The discount rates used in the cash flow models for the goodwill impairment testing consider market and industry data as well as specific risk factors for each reporting unit. The perpetual growth rates for the individual reporting units, for purposes of the terminal value determination, are generally set after an initial three-year forecasted period, although certain reporting units utilized longer forecasted periods, and are based on historical experience, market and industry data.

Intangible assets with finite useful lives mainly consist of patent rights, know-how, license agreements, customer relationships, trademarks, software to be sold, leased or otherwise marketed, music catalogs, artist contracts and television carriage agreements (broadcasting agreements). Patent rights, know-how, license agreements, trademarks and software to be sold, leased or otherwise marketed are generally amortized on a straight-line basis, generally, over three to eight years. Customer relationships, music catalogs, artist contracts and television carriage agreements (broadcasting agreements) are amortized on a straight-line basis, generally, over 10 to 40 years.

Software to be sold, leased, or marketed -

Sony accounts for software development costs in accordance with accounting guidance for the costs of software to be sold, leased, or marketed. The costs related to establishing the technological feasibility of a software product are expensed as incurred as a part of research and development in cost of sales. Costs that are incurred to produce the finished product after technological feasibility is established are capitalized and amortized to cost of sales over the estimated economic life, which is generally three years. The technological feasibility of game software is established when the product master is completed. Consideration to capitalize game software development costs before this point is limited to the development costs of games for which technological feasibility can be proven to be at an earlier stage. At each balance sheet date, Sony performs periodic reviews to ensure that unamortized capitalized software costs remain recoverable from future profits of the related software products.

Deferred insurance acquisition costs -

Costs that vary with and are primarily related to acquiring new insurance policies are deferred as long as they are recoverable. The deferred insurance acquisition costs include such items as commissions, medical examination costs and inspection report fees, and are subject to recoverability testing at least annually to ensure that the capitalized amounts do not exceed the present value of anticipated gross profits or premiums less benefits and maintenance expenses, as applicable. The deferred insurance acquisition costs for traditional life insurance contracts are amortized over the premium-paying period of the related insurance policies using assumptions consistent with those used in computing policy reserves. The deferred insurance acquisition costs for non-traditional life insurance contracts are amortized over the expected life in proportion to the estimated gross profits.

Product warranty -

Sony provides for the estimated cost of product warranties at the time revenue is recognized. The product warranty is calculated based upon product sales, estimated probability of failure and estimated cost per claim. The variables used in the calculation of the provision are reviewed on a periodic basis.

 

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Certain subsidiaries in the Consumer Products & Services and Professional, Device & Solutions segments offer extended warranty programs. The consideration received for extended warranty service is deferred and recognized as revenue on a straight-line basis over the term of the extended warranty.

Future insurance policy benefits -

Liabilities for future insurance policy benefits are primarily comprised of the present value of estimated future payments to policyholders. These liabilities are computed by the net level premium method based upon the assumptions, including future investment yield, morbidity, mortality, withdrawals and other factors. These assumptions are reviewed on a periodic basis. Liabilities for future insurance policy benefits also include liabilities for guaranteed benefits related to certain non-traditional life and annuity contracts.

Policyholders’ account in the life insurance business -

Liabilities for policyholders’ account in the life insurance business represent the contract value that has accrued to the benefit of the policyholders as of the balance sheet date. This liability is generally equal to the accumulated account deposits, plus interest credited, less policyholder withdrawals and other charges assessed against the account balances.

Impairment of long-lived assets -

Sony reviews the recoverability of the carrying value of its long-lived assets held and used, other than goodwill and intangible assets with indefinite lives, and assets to be disposed of, whenever events or changes in circumstances indicate that the individual carrying amount of an asset or asset group may not be recoverable. Long-lived assets to be held and used are reviewed for impairment by comparing the carrying value of the asset or asset group with their estimated undiscounted future cash flows. If the cash flows are determined to be less than the carrying value of the asset or asset group, an impairment loss has occurred and the loss would be recognized during the period for the difference between the carrying value of the asset or asset group and estimated fair value. Long-lived assets that are to be disposed of other than by sale are considered held and used until they are disposed of. Long-lived assets that are to be disposed of by sale are reported at the lower of their carrying value or fair value less cost to sell and are not depreciated. Fair value is determined using the present value of estimated net cash flows or comparable market values. This approach uses significant estimates and assumptions including projected future cash flows, the timing of such cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth rates applied to determine terminal values, determination of appropriate market comparables and the determination of whether a premium or discount should be applied to comparables.

Fair value measurement -

Sony measures fair value as an exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date.

 

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The accounting guidance for fair value measurements specifies a hierarchy of inputs to valuation techniques based on the extent to which inputs used in measuring fair value are observable in the market. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Sony’s assumptions about the assumptions that market participants would use in pricing the asset or liability. Observable market data is used if such data is available without undue cost and effort. Each fair value measurement is reported in one of three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

 

Level 1

 

  Inputs are unadjusted quoted prices for identical assets and liabilities in active markets.

Level 2

 

  Inputs are based on observable inputs other than level 1 prices, such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.

Level 3

 

  One or more significant inputs are unobservable.

When available, Sony uses unadjusted quoted market prices in active markets to measure fair value and classifies such items within level 1. If quoted market prices are not available, fair value is based upon internally developed valuation techniques that use, where possible, current market-based or independently sourced market parameters, such as interest rates, currency rates and option volatilities. Items valued using internally generated models are classified according to the lowest level input that is significant to the valuation. For certain financial assets and liabilities, Sony determines fair value using third-party information such as indicative quotes from dealers and quantitative input from investment advisors following Sony’s established valuation procedures including validation against internally developed prices. Additionally, Sony considers both counterparty credit risk and Sony’s own creditworthiness in determining fair value. Sony attempts to mitigate credit risk to third parties by entering into netting agreements and actively monitoring the creditworthiness of counterparties and its exposure to credit risk through the use of credit limits and by selecting major international banks and financial institutions as counterparties.

Transfers between levels are deemed to have occurred at the beginning of the each interim period in which the transfers occur.

Derivative financial instruments -

All derivatives are recognized as either assets or liabilities in the consolidated balance sheets at fair value. Changes in the fair value of derivative financial instruments are either recognized periodically in income or stockholders’ equity (as a component of accumulated other comprehensive income), depending on whether the derivative financial instrument qualifies as a hedge and the derivative is being used to hedge changes in fair value or cash flows.

The accounting guidance for hybrid financial instruments permits an entity to elect fair value remeasurement for any hybrid financial instrument if the hybrid instrument contains an embedded derivative that would otherwise be required to be bifurcated and accounted for separately under accounting guidance for derivative instruments and hedging activities. The election to measure the hybrid instrument at fair value is made on an instrument-by-instrument basis and is irreversible. Certain subsidiaries in the Financial Services segment have hybrid financial instruments, disclosed in Note 7 as debt securities, that contain embedded derivatives where the entire instrument is carried at fair value.

In accordance with accounting guidance for derivative instruments and hedging activities, the various derivative financial instruments held by Sony are classified and accounted for as described below.

 

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Fair value hedges

Changes in the fair value of derivatives designated and effective as fair value hedges for recognized assets or liabilities or unrecognized firm commitments are recognized in earnings as offsets to changes in the fair value of the related hedged assets or liabilities.

Cash flow hedges

Changes in the fair value of derivatives designated and effective as cash flow hedges for forecasted transactions or exposures associated with recognized assets or liabilities are initially recorded in other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. Changes in the fair value of the ineffective portion are recognized in current period earnings.

Derivatives not designated as hedges

Changes in the fair value of derivatives that are not designated as hedges are recognized in current period earnings.

Assessment of hedges

When applying hedge accounting, Sony formally documents all hedging relationships between the derivatives designated as hedges and the hedged items, as well as its risk management objectives and strategies for undertaking various hedging activities. Sony links all hedges that are designated as fair value or cash flow hedges to specific assets or liabilities on the consolidated balance sheets or to the specific forecasted transactions. Sony also assesses, both at the inception of the hedge and on an on-going basis, whether the derivatives that are designated as hedges are highly effective in offsetting changes in fair value or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge, Sony discontinues hedge accounting. Hedge ineffectiveness, if any, is included in the current period earnings.

Stock-based compensation -

Sony accounts for stock-based compensation using the fair value based method, measured on the date of grant using the Black-Scholes option-pricing model. The expense is mainly included in selling, general and administrative expenses. Sony recognizes this compensation expense, net of an estimated forfeiture rate, only for the rights expected to vest ratably over the requisite service period of the stock acquisition rights, which is generally a period of three years. The estimated forfeiture rate is based on Sony’s historical experience in the stock acquisition rights plans where the majority of the vesting terms have been satisfied.

Revenue recognition -

Revenues from sales in the Consumer Products & Services, Professional, Device & Solutions, Music and Sony Mobile Communications segments are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured. Delivery is considered to have occurred when the customer has taken title to the product and the risks and rewards of ownership have been substantively transferred. If the sales contract contains a customer acceptance provision, then sales are recognized after customer acceptance occurs or the acceptance provisions lapse. Revenues are recognized net of anticipated returns and sales incentives.

Revenue arrangements with customers may include multiple elements, including any combination of products, services and software. An example includes sales of electronics products with rights to receive promotional goods. For Sony’s multiple element arrangements where at least one of the elements is not subject to existing software revenue recognition guidance, elements are separated into more than one unit of accounting when the delivered element(s) have value to the customer on a standalone basis, and delivery of the undelivered

 

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element(s) is probable and substantially in the control of Sony. Revenue is then allocated to each unit of accounting based on the relative selling price of each unit of accounting based first on vendor-specific objective evidence of selling price (“VSOE”) if it exists, based next on third-party evidence of selling price (“TPE”) if VSOE does not exist, and, finally, if both VSOE and TPE do not exist, based on estimated selling prices (“ESP”). VSOE is limited to either the price charged for an element when it is sold separately or, for an element not yet being sold separately, the price established by management having the relevant authority; it must be probable that the price, once established, will not change before the separate introduction of the element into the market place. TPE is the price of Sony’s or any competitor’s largely interchangeable products or services in standalone sales to similarly situated customers. ESP is the price at which Sony would transact if the element were sold by Sony regularly on a standalone basis. When determining ESP, Sony considers all relevant inputs, including sales, cost and margin analysis of the product, targeted rate of return of the product, competitors’ and Sony’s pricing practices and customer perspectives.

Certain software products published by Sony provide limited on-line features at no additional cost to the customer. Generally, such features are considered to be incidental to the overall software product and an inconsequential deliverable. Accordingly, revenue related to software products containing these limited on-line features is not deferred. In instances where the software products’ on-line features or additional functionality is considered a substantive deliverable in addition to the software product, revenue and costs of sales are recognized ratably over an estimated service period, which is estimated to be six months.

Revenues from the theatrical exhibition of motion pictures are recognized as the customer exhibits the film. Revenues from the licensing of motion picture and television product are recorded when the product is available for exploitation by the licensee and when any restrictions regarding the use of the product lapse. Revenues from the sale of DVDs and Blu-ray Disc, net of anticipated returns and sales incentives, are recognized upon availability of sale to the public. Revenues from the sale of broadcast advertising are recognized when the advertisement is aired. Revenues from subscription fees received by the television networks are recognized when the service is provided.

Traditional life insurance policies that the life insurance subsidiary underwrites, most of which are categorized as long-duration contracts, mainly consist of whole life, term life and accident and health insurance contracts. Premiums from these policies are reported as revenue when due from policyholders.

Amounts received as payment for non-traditional contracts such as interest sensitive whole life contracts, single payment juvenile contracts and other contracts without life contingencies are recognized in policyholders’ account in the life insurance business. Revenues from these contracts are comprised of fees earned for administrative and contract-holder services, which are recognized over the period of the contracts, and included in financial services revenue.

Property and casualty insurance policies that the non-life insurance subsidiary underwrites are primarily automotive insurance contracts which are categorized as short-duration contracts. Premiums from these policies are reported as revenue over the period of the contract in proportion to the amount of insurance protection provided.

Revenue is recognized net of any taxes collected from customers and subsequently remitted to governmental authorities.

Consideration given to a customer or a reseller -

In accordance with the accounting guidance for consideration given by a vendor to a customer or reseller of the vendor’s products, sales incentives or other cash consideration given to a customer or a reseller including payments for buydowns, slotting fees and cooperative advertising programs, are accounted for as a reduction of revenue unless Sony receives an identifiable benefit (goods or services) in exchange for the consideration, the fair value of the benefit is reasonably estimated and documentation from the reseller is received to support the amounts paid to the reseller. Payments meeting these criteria are recorded as selling, general and administrative

 

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expenses. For the fiscal years ended March 31, 2010, 2011 and 2012, consideration given to a reseller, primarily for free promotional shipping and cooperative advertising programs included in selling, general and administrative expenses totaled 23,591 million yen, 23,250 million yen and 17,641 million yen, respectively.

Cost of sales -

Costs classified as cost of sales relate to the producing and manufacturing of products and include items such as material cost, subcontractor cost, depreciation of fixed assets, amortization of intangible assets, personnel expenses, research and development costs, and amortization of film costs related to motion picture and television products.

Research and development costs -

Research and development costs, included in cost of sales, include items such as salaries, personnel expenses and other direct and indirect expenses associated with research and product development. Research and development costs are expensed as incurred.

Selling, general and administrative -

Costs classified as selling expense relate to promoting and selling products and include items such as advertising, promotion, shipping, and warranty expenses. General and administrative expenses include operating items such as officers’ salaries, personnel expenses, depreciation of fixed assets, office rental for sales, marketing and administrative divisions, a provision for doubtful accounts and amortization of intangible assets.

Financial services expenses -

Financial services expenses include a provision for policy reserves and amortization of deferred insurance acquisition costs, and all other operating costs such as personnel expenses, depreciation of fixed assets, and office rental of subsidiaries in the Financial Services segment.

Advertising costs -

Advertising costs are expensed when the advertisement or commercial appears in the selected media.

Shipping and handling costs -

The majority of shipping and handling, warehousing and internal transfer costs for finished goods are included in selling, general and administrative expenses. An exception to this is in the Pictures segment where such costs are charged to cost of sales as they are an integral part of producing and distributing films under accounting guidance for accounting by producers or distributors of films. All other costs related to Sony’s distribution network are included in cost of sales, including inbound freight charges, purchasing and receiving costs, inspection costs and warehousing costs for raw materials and in-process inventory. Amounts paid by customers for shipping and handling costs are included in net sales.

Income taxes -

The provision for income taxes is computed based on the pretax income included in the consolidated statements of income, and the tax liability attributed to undistributed earnings of subsidiaries and affiliated companies accounted for by the equity method expected to be remitted in the foreseeable future. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.

 

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Carrying amounts of deferred tax assets require a reduction by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically with appropriate consideration given to all positive and negative evidence related to the realization of the deferred tax assets. Management’s judgments related to this assessment consider, among other matters, the nature, frequency and severity of current and cumulative losses on an individual tax jurisdiction basis, forecasts of future profitability after consideration of uncertain tax positions, excess of appreciated asset value over the tax basis of net assets, the duration of statutory carryforward periods, the past utilization of net operating loss carryforwards prior to expiration, as well as prudent and feasible tax planning strategies which would be employed by Sony to prevent net operating loss and tax credit carryforwards from expiring unutilized.

Sony records assets and liabilities for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Sony continues to recognize interest and penalties, if any, with respect to income taxes, including unrecognized tax benefits, as interest expense and as income tax expense, respectively, in the consolidated statements of income. The amount of income taxes Sony pays is subject to ongoing audits by various taxing authorities, which may result in proposed assessments. In addition, several significant items related to intercompany transfer pricing are currently the subject of negotiations between taxing authorities in different jurisdictions as a result of pending advance pricing agreement applications and competent authority requests. Sony’s estimate for the potential outcome for any uncertain tax issues is judgmental and requires significant estimates. Sony assesses its income tax positions and records tax benefits for all years subject to examinations based upon the evaluation of the facts, circumstances and information available at that reporting date. For those tax positions for which it is more likely than not that a tax benefit will be sustained, Sony records the amount that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. If Sony does not believe that it is more likely than not that a tax benefit will be sustained, no tax benefit is recognized. However, Sony’s future results may include favorable or unfavorable adjustments to Sony’s estimated tax liabilities due to closure of income tax examinations, the outcome of negotiations between taxing authorities in different jurisdictions, new regulatory or judicial pronouncements or other relevant events. As a result, the amount of unrecognized tax benefits, and the effective tax rate, may fluctuate significantly.

Net income (loss) attributable to Sony Corporation’s stockholders per share (“EPS”) -

Basic EPS is computed based on the weighted-average number of shares of common stock outstanding during each period. The computation of diluted EPS reflects the maximum possible dilution from conversion, exercise, or contingent issuance of securities including the conversion of contingently convertible debt instruments regardless of whether the conditions to exercise the conversion rights have been met. All potentially dilutive securities are excluded from the calculation in a situation where there is a net loss attributable to Sony Corporation’s stockholders.

 

(2) Recently adopted accounting pronouncements:

Goodwill impairment testing for reporting units with zero or negative carrying amounts -

In December 2010, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance that modifies the first step of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform the second step of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing authoritative guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This guidance was effective for Sony as of April 1, 2011. The adoption of this guidance did not have a material impact on Sony’s results of operations and financial position.

 

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Disclosure of supplementary pro forma information for business combinations -

In December 2010, the FASB issued new accounting guidance addressing when a business combination should be assumed to have occurred for the purpose of providing pro forma disclosure. The new guidance requires disclosure of revenue and income of the combined entity as though the business combination occurred as of the beginning of the comparable prior reporting period. The guidance also expands the supplemental pro forma disclosure to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The guidance was effective for Sony as of April 1, 2011. Since this guidance impacts disclosures only, its adoption did not have an impact on Sony’s results of operations and financial position.

Amendments to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”) -

In May 2011, the FASB issued new guidance to substantially converge fair value measurement and disclosure requirements under U.S. GAAP and IFRS, including a consistent definition of fair value. The amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the new guidance to result in a change in the application of the existing guidance for fair value measurements. However, some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements and other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The guidance was effective for Sony in the fourth quarter of the fiscal year ended March 31, 2012. The adoption of this guidance did not have a material impact on Sony’s results of operations and financial position.

Disclosures about an employer’s participation in a multiemployer plan -

In September 2011, the FASB issued new disclosure guidance regarding multiemployer pension and other postretirement benefit plans. This guidance requires additional quantitative and qualitative disclosures for all individually significant multiemployer pension plans on annual basis, and revises the disclosures for multiemployer plans that provide other postretirement benefits. This guidance does not change the current recognition and measurement guidance for an employer’s participation in a multiemployer plan. This guidance was effective for Sony beginning with the fiscal year ended March 31, 2012, and is applied retrospectively. Since this guidance impacts disclosures only, and Sony does not have any significant participation in multiemployer plans, its adoption did not have an impact on Sony’s results of operations and financial position.

 

(3) Recent accounting pronouncements not yet adopted:

Accounting for costs associated with acquiring or renewing insurance contracts -

In October 2010, the FASB issued new accounting guidance for costs associated with acquiring or renewing insurance contracts. Under the new guidance acquisition costs are to include only those costs that are directly related to the acquisition or renewal of insurance contracts by applying a model similar to the accounting for loan origination costs. An entity may defer incremental direct costs of contract acquisition that are incurred in transactions with independent third parties or employees as well as the portion of employee compensation and other costs directly related to underwriting, policy issuance and processing, medical inspection, and contract selling for successfully negotiated contracts. Additionally, an entity may capitalize as a deferred acquisition cost only those advertising costs meeting the capitalization criteria for direct-response advertising. This change is effective for Sony as of April 1, 2012. Sony will apply this guidance prospectively from the date of adoption. The adoption of this guidance is not expected to have a material impact on Sony’s results of operations and financial position.

Testing goodwill for impairment -

In September 2011, the FASB issued a new standard to simplify how an entity tests goodwill for impairment. The new standard allows companies an option to first assess qualitative factors to determine whether

 

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it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining if it is necessary to perform the two-step quantitative goodwill impairment test. Under the new standard, a company is no longer required to calculate the fair value of a reporting unit unless the company determines, based on the qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The new standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. This standard is effective for Sony as of April 1, 2012. The adoption of this standard is not expected to have a material impact on Sony’s results of operations and financial position.

Presentation of comprehensive income -

In June 2011, the FASB issued new accounting guidance for presentation of comprehensive income. The amendments require reporting entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. This change is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and will be applied retrospectively. Subsequently, in December 2011, the FASB issued update accounting guidance for deferral of the effective date for amendments to the presentation of reclassifications of items out of accumulated other comprehensive income. The remaining requirements of the guidance issued in June 2011 will become effective as originally issued. The guidance is effective for Sony as of April 1, 2012. Since this guidance impacts disclosures only, its adoption will not have an impact on Sony’s results of operations and financial position.

Disclosure about balance sheet offsetting -

In December 2011, the FASB issued new accounting guidance which requires entities to disclose information about offsetting and related arrangements to enable financial statement users to understand the effect of such arrangements on the statement of financial position as well as to improve comparability of balance sheets prepared under U.S. GAAP and IFRS. The new guidance is required to be applied retrospectively and is effective for Sony as of April 1, 2013. Since this guidance impacts disclosures only, its adoption will not have an impact on Sony’s results of operations and financial position.

 

(4) Reclassifications:

Certain reclassifications of the financial statements and accompanying footnotes for the fiscal years ended March 31, 2010 and 2011 have been made to conform to the presentation for the fiscal year ended March 31, 2012.

 

(5) Out of period adjustments:

The calculation of indirect taxes at a subsidiary -

In the first quarter of the fiscal year ended March 31, 2012, Sony recorded an out of period adjustment to correct an error in the calculation of indirect taxes at a subsidiary. The indirect tax calculation error began in 2005 and continued until it was identified by Sony in the first quarter of the fiscal year ended March 31, 2012. The adjustment, substantially all of which related to the Consumer Products & Services segment, impacted net sales, selling, general and administrative expenses and interest expenses and, in the aggregate, increased loss before income taxes in consolidated statements of income by 4,413 million yen for the fiscal year ended March 31, 2012. Sony determined that the adjustment was not material to the consolidated financial statements for any prior annual or interim periods and for the year ended March 31, 2012.

Revision of the presentation in the consolidated financial statements for the fiscal years ended March 31, 2010 and 2011 -

The presentation of certain amounts for the fiscal years ended March 31, 2010 and 2011 have been revised to conform with the presentation as of March 31, 2012 to reflect the results of an analysis of deferred tax assets in relation to certain unrecognized tax benefits that was completed during the fiscal year ended March 31, 2012. For

 

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the fiscal year ended March 31, 2010, within income taxes in the consolidated statements of income, this revision increased current income taxes by 30,422 million yen with a corresponding decrease to deferred income taxes, with no impact on net income and net loss attributable to Sony Corporation’s stockholders. For the fiscal year ended March 31, 2010, within operating activities in the consolidated statements of cash flows, this revision decreased deferred income taxes by 30,422 million yen, increased accrued income and other taxes by 8,320 million yen and increased other by 22,102 million yen, with no impact on net cash provided by operating activities. This revision had no impact on Sony’s consolidated statements of changes in stockholders’ equity for the fiscal year ended March 31, 2010. As of March 31, 2011, in the consolidated balance sheets, this revision increased deferred income taxes in other assets by 61,115 million yen, decreased other noncurrent assets by 74,981 million yen, decreased total assets by 13,866 million yen, increased accrued income and other taxes by 8,320 million yen, decreased other noncurrent liabilities by 22,186 million yen and decreased total liabilities and equity by 13,866 million yen. This revision had no impact on Sony’s consolidated statements of income, consolidated statements of cash flows and consolidated statements of changes in stockholders’ equity for the fiscal year ended March 31, 2011.

 

3. Inventories

Inventories are comprised of the following:

 

     Yen in millions  
     March 31  
         2011              2012      

Finished products

     529,666         498,430   

Work in process

     70,969         88,236   

Raw materials, purchased components and supplies

     103,408         120,386   
  

 

 

    

 

 

 
     704,043         707,052   
  

 

 

    

 

 

 

 

4. Film costs

Film costs are comprised of the following:

 

     Yen in millions  
     March 31  
         2011             2012      

Motion picture productions:

    

Released

     102,415        98,910   

Completed and not released

     14,260        10,800   

In production and development

     107,811        102,295   

Television productions:

    

Released

     40,581        44,461   

In production and development

     1,688        2,853   

Broadcasting rights

     24,544        27,830   

Less: current portion of broadcasting rights included in inventories

     (15,910     (17,101
  

 

 

   

 

 

 

Film costs

     275,389        270,048   
  

 

 

   

 

 

 

Sony estimates that approximately 90% of the unamortized costs of released films at March 31, 2012 will be amortized within the next three years. Approximately 84 billion yen of completed film costs are expected to be amortized during the next twelve months. Approximately 91 billion yen of accrued participation liabilities included in accounts payable, other and accrued expenses are expected to be paid during the next twelve months.

 

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5. Related party transactions

Sony accounts for its investments in affiliated companies over which Sony has significant influence under the equity method. In addition, investments in general partnerships in which Sony does not have a controlling interest and limited partnerships are also accounted for under the equity method if more than minor influence over the operation of the investee exists (generally through more than 3-5% ownership).

During fiscal year ended March 31, 2012, Sony Corporation acquired the remaining interests in Sony Ericsson Mobile Communications AB (“Sony Ericsson”) and sold all of its shares of S-LCD Corporation (“S-LCD”), both of which were considered significant equity affiliates. There are no remaining individually significant investments at March 31, 2012.

The summarized combined financial information that is based on information provided by the equity investees including information for significant equity affiliates and the reconciliation of such information to the consolidated financial statements is shown below:

Balance Sheets

 

     Yen in millions  
     March 31, 2011  
     Sony
Ericsson
    S-LCD     Others     Total  

Current assets

     254,858        188,903        183,597        627,358   

Noncurrent assets

     92,925        233,988        137,720        464,633   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     347,783        422,891        321,317        1,091,991   
  

 

 

   

 

 

   

 

 

   

 

 

 

Current liabilities

     282,857        71,572        166,056        520,485   

Long-term liabilities and noncontrolling interests

     8,089        29,696        61,036        98,821   

Stockholders’ equity

     56,837        321,623        94,225        472,685   

Percentage of ownership in equity investees

     50     50     20%-50  

Equity investment and undistributed earnings of affiliated companies, before consolidating and reconciling adjustments

     28,419        160,812       

Consolidation and reconciling adjustments:

        

Other

     (79           
  

 

 

   

 

 

     

Investment in and advances to equity investees at cost plus equity in undistributed earnings since acquisition

     28,340        160,812        32,841        221,993   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Yen in millions                    
       March 31, 2012                      

Current assets

     167,786         

Noncurrent assets

     168,143         
  

 

 

       

Total assets

     335,929         
  

 

 

       

Current liabilities

     93,535         

Long-term liabilities and noncontrolling interests

     79,513         

Stockholders’ equity

     162,881         

Percentage of ownership in equity investees

     20%-50      

Investment in and advances to equity investees
at cost plus equity in undistributed earnings
since acquisition

     36,800         
  

 

 

       

 

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Statements of Income

 

     Yen in millions  
     Fiscal year ended March 31, 2010  
     Sony
Ericsson
    S-LCD     Others     Total  

Net revenues

     837,149        796,575        323,576        1,957,300   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (81,385     3,825        29,686        (47,874

Other income (expense), net

     (4,676     (4,055    
  

 

 

   

 

 

     

Income (loss) before income taxes

     (86,061     (230    

Income tax (expense) benefit

     20,470        53       

Net income (loss) attributable to noncontrolling interests

     (3,318           
  

 

 

   

 

 

     

Net income (loss) attributable to controlling interests

     (68,909     (177     17,064        (52,022

Percentage of ownership in equity investees

     50     50     20%-50  

Equity in net income (loss) of affiliated companies, before consolidating and reconciling adjustments

     (34,455     (89    

Consolidation and reconciling adjustments:

        

Other

     (59     476       
  

 

 

   

 

 

     

Equity in net income (loss) of affiliated companies

     (34,514     387        3,892        (30,235
  

 

 

   

 

 

   

 

 

   

 

 

 
     Yen in millions  
     Fiscal year ended March 31, 2011  
     Sony
Ericsson
    S-LCD     Others     Total  

Net revenues

     673,464        807,955        268,604        1,750,023   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     16,453        12,527        17,630        46,610   

Other income (expense), net

     (1,572     (4,119    
  

 

 

   

 

 

     

Income (loss) before income taxes

     14,881        8,408       

Income tax (expense) benefit

     (6,065     3,094       

Net income (loss) attributable to noncontrolling interests

     (520           
  

 

 

   

 

 

     

Net income (loss) attributable to controlling interests

     8,296        11,502        8,895        28,693   

Percentage of ownership in equity investees

     50     50     20%-50  

Equity in net income (loss) of affiliated companies, before consolidating and reconciling adjustments

     4,148        5,751       

Consolidation and reconciling adjustments:

        

Other

     7        1,463       
  

 

 

   

 

 

     

Equity in net income (loss) of affiliated companies

     4,155        7,214        2,693        14,062   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Yen in millions  
     Fiscal year ended March 31, 2012  
     Sony
Ericsson
    S-LCD     Others     Total  

Net revenues

     475,898        146,002        123,610        745,510   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (44,239     (4,644     5,247        (43,636

Other income (expense), net

     4,504        (3,098    
  

 

 

   

 

 

     

Income (loss) before income taxes

     (39,735     (7,742    

Income tax (expense) benefit

     (73,054     (374    

Net income (loss) attributable to noncontrolling interests

     (2,729           
  

 

 

   

 

 

     

Net income (loss) attributable to controlling interests

     (115,518     (8,116     950        (122,684

Percentage of ownership in equity investees

     50     50     20%-50  

Equity in net income (loss) of affiliated companies, before consolidating and reconciling adjustments

     (57,759     (4,058    

Consolidation and reconciling adjustments:

        

Impairment loss including translation adjustments

            (60,019    

Other

     79        (1    
  

 

 

   

 

 

     

Equity in net income (loss) of affiliated companies

     (57,680     (64,078     61        (121,697
  

 

 

   

 

 

   

 

 

   

 

 

 

Sony Ericsson, a 50/50 joint venture with Telefonaktiebolaget LM Ericsson (“Ericsson”) focused on mobile phone handsets, was established in October 2001 and was included in affiliated companies accounted for under the equity method through February 15, 2012. On February 15, 2012, Sony Corporation acquired Ericsson’s 50 percent stake in Sony Ericsson, making the mobile handset business a wholly-owned subsidiary of Sony Corporation. Refer to Note 24.

S-LCD, a joint venture with Samsung Electronics Co., Ltd. (“Samsung”) focused on manufacturing amorphous TFT panels, was established in April 2004 with Sony’s ownership interest of 50% minus 1 share. S-LCD was strategic to Sony’s television business as it provided a source of high quality large screen LCD panels to differentiate Sony’s Bravia LCD televisions. In June 2011, S-LCD decreased its capital stock by 0.6 trillion Korean won and Sony received a cash distribution of 22,100 million yen from S-LCD. However, LCD panel and television market conditions became increasingly challenging and in order to respond to the situation and to strengthen their respective market competitiveness, Sony and Samsung agreed to shift to a new LCD panel business alliance in December 2011. As a result of this agreement, on January 19, 2012, Sony sold to Samsung all of its shares of S-LCD, and received cash consideration of 71,986 million yen (1.07 trillion Korean won) from Samsung. Following the transaction S-LCD was no longer an equity affiliate. During the fiscal year ended March 31, 2012, Sony recorded a 60,019 million yen other-than-temporary impairment loss on its share of S-LCD, including the reclassification to net income of foreign currency translation adjustments and the impact of exchange rate fluctuations between the initial impairment loss and closing of the sale to Samsung. Cash proceeds from the sale of the investment in S-LCD are included in sales of securities investments in the consolidated statements of cash flows.

 

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There was no significant difference between Sony’s proportionate share in the underlying net assets of the investees and the carrying value of investments in affiliated companies at March 31, 2011 and 2012.

There were no affiliated companies accounted for under the equity method with a market quotation at March 31, 2011 and 2012.

The number of affiliated companies accounted for under the equity method at March 31, 2011 and 2012 were 82 and 95, respectively.

Account balances and transactions with affiliated companies accounted for under the equity method are presented below:

 

     Yen in millions  
     March 31  
     2011      2012  

Accounts receivable, trade

     18,631             4,125   
  

 

 

    

 

 

 

Accounts payable, trade

     45,434         508   

Capital lease obligations

             39,080   
  

 

 

    

 

 

 

 

     Yen in millions  
     Fiscal year ended March 31  
     2010      2011      2012  

Sales

     132,937         96,164         79,677   
  

 

 

    

 

 

    

 

 

 

Purchases

     309,550         383,922         157,930   

Lease payments

                     24,159   
  

 

 

    

 

 

    

 

 

 

SFI Leasing Company, Limited (“SFIL”), a leasing company in Japan, is accounted for under the equity method and 34% is owned by Sony after deconsolidation in November 2010. Sony entered into a three year sale and leaseback transaction regarding certain acquired machinery and equipment with SFIL in the fiscal year ended March 31, 2012. Refer to Note 24.

Dividends from affiliated companies accounted for under the equity method for the fiscal years ended March 31, 2010, 2011 and 2012 were 5,948 million yen, 2,583 million yen and 1,964 million yen, respectively.

During the fiscal year ended March 31, 2012 and prior to the sale of its shares of S-LCD, Sony paid additional LCD panel related expenses of 22,759 million yen (292 million U.S. dollars) resulting from low capacity utilization of S-LCD.

 

6. Transfer of financial assets

The below transactions are accounted for as sales in accordance with the accounting guidance for transfers of financial assets, because Sony has relinquished control of the receivables. In each case, losses from these transactions were insignificant, and although Sony continues servicing the receivables subsequent to being sold or contributed, no servicing liabilities are recorded as the costs of collection of the sold receivables are insignificant. In addition to the cash proceeds from the sales below, net cash flows related to these transactions, including servicing fees, in the fiscal years ended March 31, 2010, 2011 and 2012 were insignificant.

Sony has established several accounts receivable sales programs in Japan whereby Sony can sell up to 50,200 million yen of eligible trade accounts receivable in the aggregate at any one time. Through these programs, Sony can sell receivables to special purpose entities owned and operated by banks. Sony can sell

 

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receivables in which the agreed upon original due dates are no more than 190 days after the sales of receivables. Total trade accounts receivable sold during the fiscal years ended March 31, 2010, 2011 and 2012 were 109,271 million yen, 136,232 million yen and 126,513 million yen, respectively.

A subsidiary of the Financial Services segment has established several receivables sales programs whereby the subsidiary can sell up to 24,000 million yen of eligible receivables in the aggregate at any one time. Through these programs, the subsidiary can sell receivables to special purpose entities owned and operated by banks. The subsidiary can sell receivables in which the agreed upon original due dates are no more than 180 days after the sales of receivables. Total receivables sold during the fiscal years ended March 31, 2010, 2011 and 2012 were 183,805 million yen, 166,025 million yen and 130,060 million yen, respectively.

During the fiscal year ended March 31, 2010, Sony established an accounts receivable sales program in the United States. Through this program, a bankruptcy-remote entity, which is consolidated by Sony’s U.S. subsidiary, can sell up to 450 million U.S. dollars of eligible trade accounts receivables in the aggregate at any one time to a commercial bank. Total trade accounts receivables sold during the fiscal year ended March 31, 2010 were 258,085 million yen. Subsequent to its establishment, Sony amended this program. While the transactions continued to qualify as sales under the new accounting guidance for transfers of financial assets, the amended program requires that a portion of the sales proceeds be held back and deferred until collection of the related receivables by the purchaser. The portion of the sales proceeds held back and deferred is initially recorded at estimated fair value, is included in other current assets and was 32,751 million yen at March 31, 2011 and 16,272 million yen at March 31, 2012. Sony includes collections on such receivables as cash flows within operating activities in the consolidated statements of cash flows since the receivables are the result of operating activities and the associated interest rate risk is insignificant due to its short-term nature. Total trade receivables sold, deferred proceeds from those sales and collections of deferred proceeds during the fiscal year ended March 31, 2011 were 414,147 million yen, 185,647 million yen and 153,550 million yen, respectively. Total trade receivables sold, deferred proceeds from those sales and collections of deferred proceeds during the fiscal year ended March 31, 2012 were 476,855 million yen, 117,343 million yen and 132,636 million yen, respectively.

The accounts receivable sales programs in Japan and in the Financial Services segment above involved qualified special purpose entities (“QSPEs”) under the accounting guidance effective prior to April 1, 2010 for transfers of financial assets. Since the QSPEs met certain criteria, they were not consolidated by Sony. From April 1, 2010, the entities that formerly met the criteria to be a QSPE are subject to the same consolidation accounting guidance as other variable interest entities (“VIEs”). Refer to Note 23.

 

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7. Marketable securities and securities investments

Marketable securities and securities investments, mainly included in the Financial Services segment, are comprised of debt and equity securities of which the aggregate cost, gross unrealized gains and losses and fair value pertaining to available-for-sale securities and held-to-maturity securities are as follows:

 

    Yen in millions  
    March 31, 2011     March 31, 2012  
    Cost     Gross
unrealized
gains
    Gross
unrealized
losses
    Fair value     Cost     Gross
unrealized
gains
    Gross
unrealized
losses
    Fair value  

Available-for-sale:

               

Debt securities:

               

Japanese national government bonds

    1,124,704        24,032        (4,971     1,143,765        1,036,946        55,384        (879     1,091,451   

Japanese local government bonds

    22,845        184        (64     22,965        33,513        163        (1     33,675   

Japanese corporate bonds

    332,567        1,511        (440     333,638        293,885        1,489        (224     295,150   

Foreign corporate bonds

    332,316        4,872        (11,367     325,821        377,609        4,705        (7,063     375,251   

Other

    8,241        109        (118     8,232        22,383        1,548        (6     23,925   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    1,820,673        30,708        (16,960     1,834,421        1,764,336        63,289        (8,173     1,819,452   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

    80,983        63,822        (3,316     141,489        60,694        53,016        (1,513     112,197   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Held-to-maturity Securities:

               

Japanese national government bonds

    2,902,342        22,420        (48,149     2,876,613        3,404,069        157,740        (4,499     3,557,310   

Japanese local government bonds

    18,912        218        (2     19,128        12,592        277               12,869   

Japanese corporate bonds

    32,349        158        (67     32,440        31,379        1,501               32,880   

Foreign corporate bonds

    47,330        13        (3     47,340        46,441        10               46,451   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    3,000,933        22,809        (48,221     2,975,521        3,494,481        159,528        (4,499     3,649,510   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    4,902,589        117,339        (68,497     4,951,431        5,319,511        275,833        (14,185     5,581,159   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents the cost and fair value of debt securities classified as available-for-sale securities and held-to-maturity securities by contractual maturity:

 

     Yen in millions  
     March 31, 2012  
     Available-for-sale securities      Held-to-maturity securities  
     Cost      Fair Value      Cost      Fair Value  

Due in one year or less

     230,037         223,870         23,552         23,625   

Due after one year through five years

     505,497         510,183         18,280         18,559   

Due after five year through ten years

     210,411         215,180         27,225         28,219   

Due after ten years

     818,391         870,219         3,425,424         3,579,107   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,764,336         1,819,452         3,494,481         3,649,510   
  

 

 

    

 

 

    

 

 

    

 

 

 

Proceeds from sales of available-for-sale securities were 785,698 million yen, 532,619 million yen and 177,850 million yen for the fiscal years ended March 31, 2010, 2011 and 2012, respectively. On these sales, gross realized gains were 39,622 million yen, 38,654 million yen and 9,593 million yen and gross realized losses were 37,537 million yen, 2,014 million yen and 1,834 million yen, respectively.

 

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Marketable securities classified as trading securities at March 31, 2011 and 2012 were 375,802 million yen and 433,491 million yen, respectively, which consist of debt and equity securities.

In the ordinary course of business, Sony maintains long-term investment securities, included in securities investments and other, issued by a number of non-public companies. The aggregate carrying amounts of the investments in non-public companies at March 31, 2011 and 2012, totaled 75,930 million yen and 93,050 million yen, respectively. Non-public equity investments are primarily valued at cost as fair value is not readily determinable.

With respect to trading securities, primarily in the Financial Services segment, Sony recorded net unrealized gains of 50,992 million yen for the fiscal year ended March 31, 2010, net unrealized losses of 10,768 million yen for the fiscal year ended March 31, 2011 and net unrealized gains of 21,216 million yen for the fiscal year ended March 31, 2012. Changes in the fair value of trading securities are primarily recognized in financial services revenue in the consolidated statements of income.

The following tables present the gross unrealized losses on, and fair value of, Sony’s investment securities with unrealized losses, aggregated by investment category and the length of time that individual investment securities have been in a continuous unrealized loss position, at March 31, 2011 and 2012.

 

     Yen in millions  
     March 31, 2011  
     Less than 12 months     12 months or More     Total  
     Fair value      Unrealized
losses
    Fair value      Unrealized
losses
    Fair value      Unrealized
losses
 

Available-for-sale:

               

Debt securities:

               

Japanese national government bonds

     223,686         (3,230     54,477         (1,741     278,163         (4,971

Japanese local government bonds

     12,434         (64                    12,434         (64

Japanese corporate bonds

     130,318         (440                    130,318         (440

Foreign corporate bonds

     126,184         (7,183     30,277         (4,184     156,461         (11,367

Other

     3,182         (118                    3,182         (118
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     495,804         (11,035     84,754         (5,925     580,558         (16,960
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Equity securities

     36,391         (3,223     386         (93     36,777         (3,316
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-maturity Securities:

               

Japanese national government bonds

     1,812,196         (48,149                    1,812,196         (48,149

Japanese local government bonds

     531         (2                    531         (2

Japanese corporate bonds

     20,788         (67                    20,788         (67

Foreign corporate bonds

     194         (3                    194         (3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     1,833,709         (48,221                    1,833,709         (48,221
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     2,365,904         (62,479     85,140         (6,018     2,451,044         (68,497
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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     Yen in millions  
     March 31, 2012  
     Less than 12 months     12 months or More     Total  
     Fair value      Unrealized
losses
    Fair value      Unrealized
losses
    Fair value      Unrealized
losses
 

Available-for-sale:

               

Debt securities:

               

Japanese national government bonds

     55,450         (877     3,048         (2     58,498         (879

Japanese local government bonds

     2,364         (1                    2,364         (1

Japanese corporate bonds

     1,034         (196     25,243         (28     26,277         (224

Foreign corporate bonds

     68,277         (6,065     83,650         (998     151,927         (7,063

Other

     335         (6                    335         (6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     127,460         (7,145     111,941         (1,028     239,401         (8,173
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Equity securities

     4,337         (318     280         (1,195     4,617         (1,513
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-maturity Securities:

               

Japanese national government bonds

                    333,702         (4,499     333,702         (4,499

Japanese local government bonds

     70         (0                    70         (0

Japanese corporate bonds

                                             

Foreign corporate bonds

                                             
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     70         (0     333,702         (4,499     333,772         (4,499
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     131,867         (7,463     445,923         (6,722     577,790         (14,185
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

For the fiscal years ended March 31, 2010, 2011 and 2012, total realized impairment losses were 5,508 million yen, 9,763 million yen and 5,530 million yen, respectively.

At March 31, 2012, Sony determined that the decline in value for securities with unrealized losses shown in the above table is not other-than-temporary in nature.

 

8. Leased assets

Sony leases certain communication and commercial equipment, plant, office space, warehouses, employees’ residential facilities and other assets. Certain of these leases have renewal and purchase options. In addition, during the fiscal year ended March 31, 2012, Sony entered into a three year sale and leaseback transaction, accounted for as a capital lease, for certain machinery and equipment. Sony received proceeds of 50,537 million yen based on the amounts recorded at fair value in the acquisition described in Note 24, and as such there was no gain in the sale and leaseback transaction. Sony has also entered into capital lease arrangements with third parties to finance certain of its motion picture productions.

 

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Leased assets under capital leases are comprised of the following:

 

     Yen in millions  
     March 31  

Class of property

   2011     2012  

Machinery, equipment and others

       9,288        58,751   

Film costs

     19,208        9,465   

Accumulated amortization

     (4,634     (20,514
  

 

 

   

 

 

 
     23,862        47,702   
  

 

 

   

 

 

 

The following is a schedule by year of the future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of March 31, 2012:

 

Fiscal year ending March 31

   Yen in millions  

2013

     20,652   

2014

     20,098   

2015

     2,035   

2016

     1,469   

2017

     1,346   

Later years

     5,647   
  

 

 

 

Total minimum lease payments

     51,247   

Less — Amount representing interest

     1,493   
  

 

 

 

Present value of net minimum lease payments

     49,754   

Less — Current obligations

     20,494   
  

 

 

 

Long-term capital lease obligations

     29,260   
  

 

 

 

Rental expenses under operating leases for the fiscal years ended March 31, 2010, 2011 and 2012 were 87,077 million yen, 78,538 million yen and 76,188 million yen, respectively. Sublease rentals received under operating leases for the fiscal years ended March 31, 2010, 2011 and 2012 were 1,675 million yen, 1,974 million yen and 1,423 million yen, respectively. The total minimum rentals to be received in the future under noncancelable subleases for operating leases as of March 31, 2012 were 4,527 million yen.

The minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at March 31, 2012 are as follows:

 

Fiscal year ending March 31

   Yen in millions  

2013

     42,789   

2014

     33,110   

2015

     24,087   

2016

     17,368   

2017

     13,653   

Later years

     49,174   
  

 

 

 

Total minimum future rentals

     180,181   
  

 

 

 

 

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9. Goodwill and intangible assets

Intangible assets acquired during the fiscal year ended March 31, 2012 totaled 174,430 million yen, of which 174,275 million yen is subject to amortization and are comprised of the following:

 

     Intangible assets
acquired  during the year
     Weighted-average
amortization period
 
     Yen in millions      Years  

Patent rights, know-how and license agreements*1

     103,036         7   

Customer relationships

     19,793         14   

Trademarks

     14,177         7   

Software to be sold, leased or otherwise marketed

     23,621         3   

Other

     13,648         4   

 

*1 Includes intellectual property cross-licensing and developed technology relating to the Sony Ericsson acquisition. Refer to Note 24.

Intangible assets subject to amortization are comprised of the following:

 

     Yen in millions  
     March 31, 2011     March 31, 2012  
     Gross carrying
amount
     Accumulated
amortization
    Gross carrying
amount
     Accumulated
amortization
 

Patent rights, know-how and license agreements

     122,444         (69,224     226,142         (80,334

Customer relationships

     3,051         (1,105     23,758         (1,409

Trademarks

     4,938         (1,401     20,214         (2,154

Software to be sold, leased or otherwise marketed

     76,112         (40,447     98,852         (58,865

Music catalogs

     160,325         (40,455     157,699         (45,570

Artist contracts

     27,727         (17,903     27,401         (19,419

Television carriage agreements
(broadcasting agreements)

     35,874         (228     36,216         (2,370

Other

     82,519         (40,136     87,843         (54,338
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     512,990         (210,899     678,125         (264,459
  

 

 

    

 

 

   

 

 

    

 

 

 

The aggregate amortization expense for intangible assets for the fiscal years ended March 31, 2010, 2011 and 2012 was 57,069 million yen, 52,763 million yen and 57,023 million yen, respectively. The estimated aggregate amortization expense for intangible assets for the next five years is as follows:

 

Fiscal year ending March 31

   Yen in millions  

2013

     68,735   

2014

     58,885   

2015

     48,971   

2016

     41,218   

2017

     36,509   

 

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Total carrying amount of intangible assets having an indefinite life are comprised of the following:

 

     Yen in millions  
     March 31  
     2011      2012  

Trademarks

     66,967         66,729   

Distribution agreements

     18,834         18,807   

Other

     3,230         4,497   
  

 

 

    

 

 

 

Total

     89,031         90,033   
  

 

 

    

 

 

 

The changes in the carrying amount of goodwill by segment for the fiscal years ended March 31, 2011 and 2012 are as follows:

 

    Yen in millions  
    Consumer
Products &
Services
    Professional,
Device &
Solutions
    Pictures     Music     Financial
Services
    Sony
Mobile*1
    All Other     Total  

Balance, March 31, 2010:

               

Goodwill — gross

    135,591        65,123        102,481        110,192        3,020               36,749        453,156   

Accumulated impairments

    (5,320     (300            (306     (706            (7,655     (14,287
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill

    130,271        64,823        102,481        109,886        2,314               29,094        438,869   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) due to:

               

Acquisitions*2

           1,085        46,504        203                      55        47,847   

Sales and dispositions

    (257                                               (257

Impairments

                                                       

Translation adjustments

    (770     31        (8,401     (6,956                   (1,239     (17,335

Other*3

    171        232               (445                   (77     (119
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2011:

               

Goodwill — gross

    134,735        66,471        140,584        102,994        3,020               35,488        483,292   

Accumulated impairments

    (5,320     (300            (306     (706            (7,655     (14,287
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill

    129,415        66,171        140,584        102,688        2,314               27,833        469,005   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) due to:

               

Acquisitions

    166               1,330                      128,522        4,358        134,376   

Sales and dispositions

           (589                                        (589

Impairments*4

                                              (932     (932

Translation adjustments

    (65     (184     (3,073     (1,891            9,733        (559     3,961   

Other*3*5

    (201     (28,773     (521     (147                   579        (29,063
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2012:

               

Goodwill — gross

    134,635        36,925        138,320        100,956        3,020        138,255        39,866        591,977   

Accumulated impairments

    (5,320     (300            (306     (706            (8,587     (15,219
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill

    129,315        36,625        138,320        100,650        2,314        138,255        31,279        576,758   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

*1 The amounts in the Sony Mobile Communications (“Sony Mobile”) segment relate to the Sony Ericsson acquisition. Refer to Note 24.

 

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*2 Substantially all of the acquisition amounts in the Pictures segment relate to the Game Show Network, LLC (“GSN”) acquisition. Refer to Note 24.

 

*3 Other primarily consists of purchase price adjustments for prior years and amounts reclassified as held for sale.

 

*4 During the fiscal year ended March 31, 2012, Sony recorded impairment losses of 932 million yen in a reporting unit included in All Other. The impairment charge reflected the overall decline in the fair value of the reporting unit. The fair value of the reporting unit was estimated using the expected present value of future cash flows.

 

*5 During the fiscal year ended March 31, 2012, Sony entered into a memorandum of understanding with a third-party to sell the chemical products business, which is included in the Professional, Device & Solutions segment. Sony classified certain assets and liabilities related to the business as held for sale as of March 31, 2012, and anticipates completing the divestiture during the fiscal year ending March 31, 2013. No impairment loss was recognized as a result of the held for sale classification. The assets held for sale include 29,182 million yen of goodwill and it was reclassified to other assets in the consolidated balance sheets. Refer to Note 25.

As described in Note 2, Sony performs an annual impairment test for goodwill. As a result of the impairment test, there were no impairments other than the one noted above for the fiscal year ended March 31, 2012.

 

10. Insurance-related accounts

Sony’s Financial Services segment subsidiaries in Japan maintain their accounting records as described in Note 2 in accordance with the accounting principles and practices generally accepted in Japan, which vary in some respects from U.S. GAAP.

Those differences are mainly that insurance acquisition costs for life and non-life insurance are charged to income when incurred in Japan whereas in the U.S. those costs are deferred and amortized generally over the premium-paying period of the related insurance policies, and that future policy benefits for life insurance calculated locally under the authorization of the supervisory administrative agencies are comprehensively adjusted to a net level premium method with certain adjustments of actuarial assumptions for U.S. GAAP purposes. For purposes of preparing the consolidated financial statements, appropriate adjustments have been made to reflect the accounting for these items in accordance with U.S. GAAP.

The combined amounts of statutory net equity of the insurance subsidiaries, which is not measured in accordance with U.S. GAAP, as of March 31, 2011 and 2012 were 232,160 million yen and 282,846 million yen, respectively.

 

(1) Insurance policies:

Life insurance policies that a subsidiary in the Financial Services segment underwrites, most of which are categorized as long-duration contracts, mainly consist of whole life, term life and accident and health insurance contracts. The life insurance revenues for the fiscal years ended March 31, 2010, 2011 and 2012 were 554,650 million yen, 600,291 million yen and 654,986 million yen, respectively. Property and casualty insurance policies that a subsidiary in the Financial Services segment underwrites are primarily automotive insurance contracts, which are categorized as short-duration contracts. The non-life insurance revenues for the fiscal years ended March 31, 2010, 2011 and 2012 were 64,987 million yen, 71,037 million yen and 76,958 million yen, respectively.

 

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(2) Deferred insurance acquisition costs:

Costs that vary with and are primarily related to acquiring new insurance policies are deferred as long as they are recoverable. The deferred insurance acquisition costs include such items as commissions, medical examination costs and inspection report fees, and are subject to recoverability testing at least annually to ensure that the capitalized amounts do not exceed the present value of anticipated gross profits or premiums less benefits and maintenance expenses, as applicable. The deferred insurance acquisition costs for traditional life insurance contracts are amortized over the premium-paying period of the related insurance policies using assumptions consistent with those used in computing policy reserves. The deferred insurance acquisition costs for non-traditional life insurance contracts are amortized over the expected life in proportion to the estimated gross profits. Amortization charged to income for the fiscal years ended March 31, 2010, 2011 and 2012 amounted to 53,767 million yen, 59,249 million yen and 55,427 million yen, respectively.

 

(3) Future insurance policy benefits:

Liabilities for future policy benefits, which mainly related to individual life insurance policies, are established in amounts adequate to meet the estimated future obligations of policies in force. These liabilities, which require significant management judgment and estimates, are computed by the net level premium method based upon the assumptions as to future investment yield, morbidity, mortality, withdrawals and other factors. Future policy benefits are computed using interest rates ranging from 1.4% to 4.5% and are based on factors such as market conditions and expected investment returns. Morbidity, mortality and withdrawal assumptions for all policies are based on either the subsidiary’s own experience or various actuarial tables. Generally these assumptions are locked-in throughout the life of the contract upon the issuance of new insurance, although significant changes in experience or assumptions may require Sony to provide for expected future losses. At March 31, 2011 and 2012, future insurance policy benefits amounted to 2,918,960 million yen and 3,202,066 million yen, respectively.

 

(4) Policyholders’ account in the life insurance business:

Policyholders’ account in the life insurance business represents an accumulation of account deposits plus credited interest less withdrawals, expenses and mortality charges. Policyholders’ account includes universal life insurance and investment contracts. Universal life insurance includes interest sensitive whole life contracts and variable contracts. The credited rate associated with interest sensitive whole life contracts is 2.0%. For variable contracts, policy values are expressed in terms of investment units. Each unit is linked to an asset portfolio. The value of a unit increases or decreases based on the value of the linked assets portfolio. Investment contracts mainly include single payment juvenile contracts and policies after the start of annuity payments. The credited rates associated with investment contracts ranges from 0.1% to 6.3%.

Policyholders’ account in the life insurance business is comprised of the following:

 

     Yen in millions  
     March 31  
     2011      2012  

Universal life insurance

     896,539         1,010,277   

Investment contracts

     322,580         340,600   

Other

     82,133         98,767   
  

 

 

    

 

 

 

Total

     1,301,252         1,449,644   
  

 

 

    

 

 

 

 

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11. Short-term borrowings and long-term debt

Short-term borrowings are comprised of the following:

 

     Yen in millions  
     March 31  
     2011      2012  

Unsecured loans:

     

with a weighted-average interest rate of 4.40%

     43,737      

with a weighted-average interest rate of 3.98%

        89,878   

Secured call money:

     

with a weighted-average interest rate of 0.11%

     10,000      

with a weighted-average interest rate of 0.11%

        10,000   
  

 

 

    

 

 

 
     53,737         99,878   
  

 

 

    

 

 

 

At March 31, 2012, securities investments with a book value of 10,845 million yen were pledged as collateral for 10,000 million yen of call money, by subsidiaries in the Financial Services segment. In addition, marketable securities with a book value of 129,472 million yen were pledged as collateral for cash settlements, variation margins of futures markets and certain other purposes at March 31, 2012.

Long-term debt is comprised of the following:

 

     Yen in millions  
     March 31  
     2011      2012  

Unsecured loans, representing obligations principally to banks:

     

Due 2011 to 2018, with interest rates ranging from 0.20% to 4.50% per annum

     441,976      

Due 2012 to 2024, with interest rates ranging from 0.23% to 4.50% per annum

        564,275   

Unsecured 1.52% bonds, due 2011, net of unamortized discount

     50,000      

Unsecured 1.16% bonds, due 2012, net of unamortized discount

     39,996         39,999   

Unsecured 1.52% bonds, due 2013, net of unamortized discount

     34,999         35,000   

Unsecured 1.57% bonds, due 2015, net of unamortized discount

     29,991         29,993   

Unsecured 1.75% bonds, due 2015, net of unamortized discount

     24,996         24,997   

Unsecured 1.17% bonds, due 2011

     10,500      

Unsecured 0.95% bonds, due 2012

     60,000         60,000   

Unsecured 1.40% bonds, due 2013

     10,700         10,700   

Unsecured 1.30% bonds, due 2014

     110,000         110,000   

Unsecured 0.55% bonds, due 2016

        10,000   

Unsecured 0.66% bonds, due 2017

        45,000   

Unsecured 2.00% bonds, due 2018

     16,300         16,300   

Unsecured 2.07% bonds, due 2019

     50,000         50,000   

Unsecured 1.41% bonds, due 2022

        10,000   

Capital lease obligations:

     

Due 2011 to 2021, with interest rates ranging from 0.03% to 9.09% per annum
Due 2012 to 2026, with interest rates ranging from 0.03% to 8.74% per annum

     24,673         49,754   

Guarantee deposits received

     17,718         16,691   
  

 

 

    

 

 

 
     921,849         1,072,709   

Less — Portion due within one year

     109,614         310,483   
  

 

 

    

 

 

 
     812,235         762,226   
  

 

 

    

 

 

 

 

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In March 2012, Sony executed a 1,365 million U.S. dollar unsecured bank loan with a group of lenders having six to ten year maturity terms in connection with acquiring Ericsson’s 50% equity interest in Sony Ericsson. This bank loan utilizes the Japan Bank for International Cooperation (“JBIC”) Facility, which was established to facilitate overseas mergers and acquisitions by Japanese companies as one of countermeasures against yen appreciation. Of the 1,365 million U.S. dollar loan, 60% or 819 million U.S. dollars is from the JBIC Facility and 40% or 546 million U.S. dollars is from private banks. The terms of this U.S. dollar loan agreement require accelerated repayment of the loan if Sony Corporation or its wholly-owned subsidiaries discontinue the business of mobile devices featuring telephone functionality.

There are no significant adverse debt covenants or cross-default provisions related to the above borrowings.

Aggregate amounts of annual maturities of long-term debt are as follows:

 

Fiscal year ending March 31

   Yen in millions  

2013

     310,483   

2014

     135,487   

2015

     209,814   

2016

     77,391   

2017

     97,419   

Later years

     242,115   
  

 

 

 

Total

     1,072,709   
  

 

 

 

At March 31, 2012, Sony had unused committed lines of credit amounting to 800,306 million yen and can generally borrow up to 180 days from the banks with whom Sony has committed line contracts. Furthermore, at March 31, 2012, Sony has commercial paper programs, the size of which was 746,570 million yen. Sony can issue commercial paper for a period generally not in excess of 270 days up to the size of the programs.

 

12. Housing loans and deposits from customers in the banking business

 

(1) Housing loans in the banking business:

Sony acquires and holds certain financial receivables in the normal course of business. A majority of financing receivables held by Sony consist of housing loans in the banking business and no other significant financial receivables exist.

A subsidiary in the banking business monitors the credit quality of housing loans based on the classification set by the financial conditions and the past due status of individual obligators. Past due status is monitored on a daily basis and the aforementioned classification is reviewed on a quarterly basis.

The allowance for the credit losses is established based on the aforementioned classifications and the evaluation of collateral. The amount of housing loans in the banking business and the corresponding allowance for credit losses at March 31, 2011 were 656,047 million yen and 925 million yen, and at March 31, 2012 were 749,636 million yen and 1,066 million yen, respectively. During the fiscal year ended March 31, 2011 and 2012, charge-offs on housing loans in the banking business and changes in the allowance for credit losses, which took into consideration the impact of the Great East Japan Earthquake discussed in Note 18, were not significant.

In addition, the balance of housing loans placed on nonaccrual status or past due status were not significant at March 31, 2011 and 2012. A subsidiary in the banking business assesses the nonaccrual status based on the aforementioned classification, and may resume the accrual of the interest on the housing loan if the classification of the housing loan is changed.

 

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(2) Deposits from customers in the banking business:

All deposits from customers in the banking business within the Financial Services segment are interest bearing deposits. At March 31, 2011 and 2012, the balances of time deposits issued in amounts of 10 million yen or more were 247,799 million yen and 374,665 million yen, respectively. These amounts have been classified as current liabilities due to the ability of the customers to make withdrawals prior to maturity.

At March 31, 2012, aggregate amounts of annual maturities of time deposits with a remaining term of more than one year are as follows:

 

Fiscal year ending March 31

   Yen in millions  

2014

     32,531   

2015

     11,421   

2016

     9,064   

2017

     3,946   

2018

     2,104   

Later years

     33,721   
  

 

 

 

Total

     92,787   
  

 

 

 

 

13. Fair value measurements

As discussed in Note 2, assets and liabilities subject to the accounting guidance for fair value measurements held by Sony are classified and accounted for as described below.

 

(1) Assets and liabilities that are measured at fair value on a recurring basis:

The following section describes the valuation techniques used by Sony to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which each instrument is generally classified.

Trading securities, available-for-sale securities and other investments

Where quoted prices are available in an active market, securities are classified in level 1 of the fair value hierarchy. Level 1 securities include exchange-traded equities. If quoted market prices are not available for the specific security or the market is inactive, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows and mainly classified in level 2 of the hierarchy. Level 2 securities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, such as the majority of government bonds and corporate bonds. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the fair value hierarchy. Level 3 securities do not have actively traded quotes at the balance sheet date and require the use of unobservable inputs, such as indicative quotes from dealers and qualitative input from investment advisors, to value these securities. Level 3 assets include financial instruments whose value is determined using pricing models, discounted cash flow techniques, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation of assumptions that market participants would use in pricing the asset. Level 3 securities primarily include certain hybrid financial instruments and certain private equity investments not classified within levels 1 or 2.

Derivatives

Exchange-traded derivatives valued using quoted prices are classified within level 1 of the fair value hierarchy. However, few classes of derivative contracts are listed on an exchange; thus, the majority of Sony’s

 

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derivative positions are valued using internally developed models that use as their basis readily observable market parameters — i.e., parameters that are actively quoted and can be validated to external sources, including industry pricing services. Depending on the types and contractual terms of derivatives, fair value can be modeled using a series of techniques, such as the Black-Scholes option pricing model, which are consistently applied. Where derivative products have been established for some time, Sony uses models that are widely accepted in the financial services industry. These models reflect the contractual terms of the derivatives, including the period to maturity, and market-based parameters such as interest rates, volatility, and the credit rating of the counterparty. Further, many of these models do not contain a high level of subjectivity as the techniques used in the models do not require significant judgment, and inputs to the model are readily observable from actively quoted markets. Such instruments are generally classified within level 2 of the fair value hierarchy.

In determining the fair value of Sony’s interest rate swap derivatives, Sony uses the present value of expected cash flows based on market observable interest rate yield curves commensurate with the term of each instrument. For foreign currency derivatives, Sony’s approach is to use forward contract and option valuation models employing market observable inputs, such as spot currency rates, time value and option volatilities. These derivatives are classified within level 2 since Sony primarily uses observable inputs in its valuation of its derivative assets and liabilities.

The fair value of Sony’s assets and liabilities that are measured at fair value on a recurring basis at March 31, 2011 and 2012 are as follows:

 

    Yen in millions  
    March 31, 2011  
                            Presentation in the consolidated balance sheets  
    Level 1     Level 2     Level 3     Total     Marketable
securities
    Securities
investments
and other
    Other
current
assets/
liabilities
    Other
noncurrent
assets/

liabilities
 

Assets:

               

Trading securities

    189,320        186,482               375,802        375,802                        

Available-for-sale securities

               

Debt securities

               

Japanese national government bonds

           1,143,765               1,143,765        71,472        1,072,293                 

Japanese local government bonds

           22,965               22,965        3,415        19,550                 

Japanese corporate bonds

           329,057        4,581        333,638        96,745        236,893                 

Foreign corporate bonds

           306,070        19,751        325,821        81,486        244,335                 

Other

           7,933        299        8,232               8,232                 

Equity securities

    141,408        81               141,489               141,489                 

Other investments*1

    5,459        4,637        74,026        84,122               84,122                 

Derivative assets*2

           15,110               15,110                      15,101        9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    336,187        2,016,100        98,657        2,450,944        628,920        1,806,914        15,101        9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

               

Derivative liabilities*2

           33,759               33,759                      32,096        1,663   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

           33,759               33,759                      32,096        1,663   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Yen in millions  
    March 31, 2012  
          Presentation in the consolidated balance sheets  
    Level 1     Level 2     Level 3     Total     Marketable
securities
    Securities
investments
and other
    Other
current
assets/
liabilities
    Other
noncurrent
assets/

liabilities
 

Assets:

               

Trading securities

    214,036        219,455               433,491        433,491                        

Available-for-sale securities

               

Debt securities

               

Japanese national government bonds

           1,091,451               1,091,451        23,267        1,068,184                 

Japanese local government bonds

           33,675               33,675        1,405        32,270                 

Japanese corporate bonds

           293,637        1,513        295,150        123,434        171,716                 

Foreign corporate bonds

           359,960        15,291        375,251        75,764        299,487                 

Other

           23,616        309        23,925               23,925                 

Equity securities

    111,517        680               112,197               112,197                 

Other investments*1

    5,475        4,592        73,451        83,518               83,518                 

Derivative assets*2

           18,518               18,518                      18,513        5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    331,028        2,045,584        90,564        2,467,176        657,361        1,791,297        18,513        5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

               

Derivative liabilities*2

           41,218               41,218                      40,034        1,184   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

           41,218               41,218                      40,034        1,184   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

*1 Other investments include certain hybrid financial instruments and certain private equity investments.

 

*2 Derivative assets and liabilities are recognized and disclosed on a gross basis.

There were no significant transfers between levels 1 and 2 for the fiscal year ended March 31, 2011. Transfers into level 1 were 2,169 million yen for the fiscal year ended March 31, 2012 as quoted prices for certain trading securities became available in an active market. Transfers out of level 1 were 7,221 million yen for the fiscal year ended March 31, 2012 as quoted prices for certain trading securities were not available in an active market.

 

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The changes in fair value of level 3 assets and liabilities for the fiscal years ended March 31, 2011 and 2012 are as follows:

 

     Yen in millions  
     Fiscal year ended March 31, 2011  
     Assets  
     Available-for-sale
securities
    Other
investments
 
   Debt securities    
   Japanese
corporate
bonds
    Foreign
corporate
bonds
    Other    

Beginning balance

     1,097        17,433               73,608   

Total realized and unrealized gains (losses):

        

Included in earnings*1

     (13     (224            (3,332

Included in other comprehensive income (loss)*2

     (18     (841     (1     2,638   

Purchases, issuances, sales and settlements

     3,515        7,951        300        1,112   

Transfers in and/or out of level 3

            (4,568              
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

     4,581        19,751        299        74,026   
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes in unrealized gains (losses) relating to instruments still held at reporting date:

        

Included in earnings*1

     (2     10               (3,779
     Yen in millions  
     Fiscal year ended March 31, 2012  
     Assets  
     Available-for-sale
securities
    Other
investments
 
   Debt securities    
   Japanese
corporate
bonds
    Foreign
corporate
bonds
    Other    

Beginning balance

     4,581        19,751        299        74,026   

Total realized and unrealized gains (losses):

        

Included in earnings*1

            27               (1,214

Included in other comprehensive income (loss)*2

     (2     271        10        505   

Purchases

            6,994               3,144   

Settlements

     (500     (5,961            (2,784

Transfers into level 3*3

     2,116        956                 

Transfers out of level 3*4

     (4,682     (6,747              

Other

                          (226
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

     1,513        15,291        309        73,451   
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes in unrealized gains (losses) relating to instruments still held at reporting date:

        

Included in earnings*1

            (2            (1,215

 

*1 Earning effects are included in financial services revenue in the consolidated statements of income.

 

*2 Unrealized gains (losses) are included in unrealized gains (losses) on securities in the consolidated statements of changes in stockholders’ equity.

 

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*3 Certain corporate bonds were transferred into level 3 because differences between fair value determined by indicative quotes from dealers and internally developed prices became significant and the observability of inputs decreased.

 

*4 Certain corporate bonds were transferred out of level 3 because quoted prices became available.

Level 3 assets include certain hybrid financial instruments for which the price fluctuates primarily based on the main stock index in Japan (Nikkei index), certain private equity investments, and certain domestic and foreign corporate bonds for which quoted prices are not available in a market and where there is less transparency around inputs. In determining the fair value of such assets, Sony uses third-party information such as indicative quotes from dealers without adjustment. For validating the fair values, Sony primarily uses internal models which include management judgment or estimation of assumptions that market participants would use in pricing the asset.

 

(2) Assets and liabilities that are measured at fair value on a nonrecurring basis:

Sony also has assets and liabilities that are required to be recorded at fair value on a nonrecurring basis when certain circumstances occur. During the fiscal years ended March 31, 2011 and 2012, such measurements of fair value related primarily to the impairments of long-lived assets, the remeasurement of the previously owned equity interests as part of the Game Show Network and Sony Ericsson acquisitions, and the S-LCD impairment.

Long-lived assets impairments

Long-lived assets are measured at the lesser of carrying value or fair value if such assets are held for sale or when there is a determination that the asset is impaired. During the fiscal years ended March 31, 2011 and 2012, Sony recorded impairment losses of 23,735 million yen and 59,583 million yen related to long-lived assets with carrying values prior to impairment of 27,513 million yen and 67,875 million yen; the fair value of the long-lived assets after impairments was 3,778 million yen and 8,292 million yen, respectively. Sony’s determination of fair value was based on the comparable market values or estimated net cash flows which considered prices and other relevant information generated by market transactions involving comparable assets or cash flow projections based upon the most recent business plan. These measurements are classified as level 3 because significant unobservable inputs, such as the conditions of the assets or projections of future cash flows, were considered in the fair value measurements.

Remeasurement of previously owned equity interests

During the fiscal years ended March 31, 2011 and 2012, Sony remeasured to fair value the previously owned equity interests as part of the Game Show Network and Sony Ericsson acquisitions. These measurements are classified as level 3 because significant unobservable inputs, such as projections of future cash flows and market comparables of similar transactions and companies were considered in the fair value measurements. Refer to Note 24.

S-LCD impairment

During the fiscal year ended March 31, 2012, Sony recorded a 60,019 million yen other-than-temporary impairment loss on its share of S-LCD, including the reclassification to net income of foreign currency translation adjustments and the impact of the exchange rate fluctuations between the initial impairment loss and closing of the sale to Samsung. The fair value of the shares of S-LCD after impairment was 71,662 million yen which approximated the cash consideration of 1.07 trillion Korean won subsequently received from Samsung upon its acquisition of Sony’s share of S-LCD. This measurement is classified as level 3 because significant unobservable inputs, primarily the estimate of the cash that would be received upon the sale to Samsung were considered in the fair value measurement. Refer to Note 5.

 

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(3) Financial instruments:

The estimated fair values by fair value hierarchy level of certain financial instruments that are not reported at fair value are summarized as follows:

 

     Yen in millions  
     March 31, 2011  
     Estimated fair value      Carrying
amount
 
     Level 1      Level 2      Level 3      Total      Total  

Assets:

              

Housing loans in the banking business

             714,985                 714,985         656,047   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

             714,985                 714,985         656,047   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

              

Long-term debt including the current portion

             928,820                 928,820         921,849   

Investment contracts included in policyholders’ account in the life insurance business

             320,036                 320,036         322,649   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

             1,248,856                 1,248,856         1,244,498   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Yen in millions  
     March 31, 2012  
     Estimated fair value      Carrying
amount
 
     Level 1      Level 2      Level 3      Total      Total  

Assets:

              

Housing loans in the banking business

             823,668                 823,668         749,636   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

             823,668                 823,668         749,636   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

              

Long-term debt including the current portion

             1,069,914                 1,069,914         1,072,709   

Investment contracts included in policyholders’ account in the life insurance business

             338,589                 338,589         340,600   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

             1,408,503                 1,408,503         1,413,309   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The summary excludes cash and cash equivalents, call loans, time deposits, notes and accounts receivable, trade, call money, short-term borrowings, notes and accounts payable, trade and deposits from customers in the banking business because the carrying values of these financial instruments approximated their fair values due to their short-term nature. The summary also excludes held-to-maturity securities disclosed in Note 7.

Cash and cash equivalents, call loans and call money are classified in level 1. Time deposits, short-term borrowings, deposits from customers in the banking business are classified in level 2. Held-to-maturity securities, included in marketable securities and securities investments and other in the consolidated balance sheets,

 

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primarily include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, such as the majority of government bonds and corporate bonds and are substantially all classified in level 2. The fair values of housing loans in the banking business, included in securities investments and other in the consolidated balance sheets, were estimated based on the discounted future cash flows using interest rates reflecting London InterBank Offered Rate base yield curve with a certain risk premium. The fair values of long-term debt including the current portion and investment contracts included in policyholders’ account in the life insurance business were estimated based on either the market value or the discounted future cash flows using Sony’s current incremental borrowing rates for similar liabilities.

 

14. Derivative instruments and hedging activities

Sony has certain financial instruments including financial assets and liabilities acquired in the normal course of business. Such financial instruments are exposed to market risk arising from the changes of foreign currency exchange rates and interest rates. In applying a consistent risk management strategy for the purpose of reducing such risk, Sony uses derivative financial instruments, which include foreign exchange forward contracts, foreign currency option contracts, and interest rate swap agreements (including interest rate and currency swap agreements). Certain other derivative financial instruments are entered into in the Financial Services segment for asset-liability management (ALM) purposes. These instruments are executed with creditworthy financial institutions, and virtually all foreign currency contracts are denominated in U.S. dollars, euros and other currencies of major countries. These derivatives generally mature or expire within six months after the balance sheet date. Other than derivatives utilized in the Financial Services segment for ALM, Sony does not use derivative financial instruments for trading or speculative purposes. These derivative transactions utilized for ALM in the Financial Services segment are executed within a certain limit in accordance with an internal risk management policy.

Derivative financial instruments held by Sony are classified and accounted for as described below.

Fair value hedges

Both the derivatives designated as fair value hedges and the hedged items are reflected at fair value in the consolidated balance sheets. Changes in the fair value of the derivatives designated as fair value hedges as well as offsetting changes in the carrying value of the underlying hedged items are recognized in income. For the fiscal years ended March 31, 2010, 2011 and 2012, these fair value hedges were fully effective. In addition, there were no amounts excluded from the assessment of hedge effectiveness of fair value hedges.

Cash flow hedges

Changes in the fair value of derivatives designated as cash flow hedges are initially recorded in other comprehensive income (“OCI”) and reclassified into earnings when the hedged transaction affects earnings. For the fiscal years ended March 31, 2010, 2011 and 2012, the ineffective portion of the hedging relationship is not significant. In addition, there were no amounts excluded from the assessment of hedge effectiveness for cash flow hedges.

Derivatives not designated as hedges

Changes in the fair value of derivatives not designated as hedges are recognized in income.

A description of the purpose and classification of the derivative financial instruments held by Sony is as follows:

Foreign exchange forward contracts and foreign currency option contracts

Foreign exchange forward contracts and purchased and written foreign currency option contracts are utilized primarily to limit the exposure affected by changes in foreign currency exchange rates on cash flows generated

 

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by anticipated intercompany transactions and intercompany accounts receivable and payable denominated in foreign currencies. The majority of written foreign currency option contracts are a part of range forward contract arrangements and expire in the same month with the corresponding purchased foreign currency option contracts.

Sony also enters into foreign exchange forward contracts, which effectively fix the cash flows from foreign currency denominated debt. Accordingly, these derivatives have been designated as cash flow hedges.

Foreign exchange forward contracts and foreign currency option contracts that do not qualify as hedges are marked-to-market with changes in value recognized in other income and expenses.

Foreign exchange forward contracts, foreign currency option contracts and currency swap agreements held by certain subsidiaries in the Financial Services segment are marked-to-market with changes in value recognized in financial service revenue.

Interest rate swap agreements (including interest rate and currency swap agreements)

Interest rate swap agreements are utilized primarily to lower funding costs, to diversify sources of funding and to limit Sony’s exposure associated with underlying debt instruments and available-for-sale debt securities resulting from adverse fluctuations in interest rates, foreign currency exchange rates and changes in fair values. Interest rate swap agreements entered into in the Financial Services segment are used for reducing the risk arising from the changes in the fair value of fixed rate available-for-sale debt securities. These derivatives are considered to be a hedge against changes in the fair value of available-for-sale debt securities in the Financial Services segment. Accordingly, these derivatives have been designated as fair value hedges.

Sony also enters into certain interest rate swap agreements for the purpose of reducing the risk arising from the changes in anticipated cash flows of variable rate debt and foreign currency denominated debt. These interest rate swap agreements, which effectively swap foreign currency denominated variable rate debt for functional currency denominated fixed rate debt, are considered to be a hedge against changes in the anticipated cash flows of Sony’s foreign denominated variable rate obligations. Accordingly, these derivatives have been designated as cash flow hedges.

Certain subsidiaries in the Financial Services segment have interest rate swap agreements as part of their ALM, which are marked-to-market with changes in value recognized in financial service revenue.

Any other interest rate swap agreements that do not qualify as hedges, which are used for reducing the risk arising from changes of variable rate debt, are marked-to-market with changes in value recognized in other income and expenses.

Other agreements

Certain subsidiaries in the Financial Services segment have credit default swap agreements, equity future contracts, other currency contracts and hybrid financial instruments as part of their ALM, which are marked-to-market with changes in value recognized in financial services revenue. The hybrid financial instruments, disclosed in Note 7 as debt securities, contain embedded derivatives that are not required to be bifurcated because the entire instruments are carried at fair value.

 

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The estimated fair values of Sony’s outstanding derivative instruments are summarized as follows:

 

Derivatives designated as
hedging instruments

 

Yen in millions

 
 

Balance sheet location

  Fair value    

Balance sheet location

  Fair value  
      March 31         March 31  
 

Asset derivatives

      2011             2012        

Liability derivatives

      2011             2012      

Interest rate contracts

  Prepaid expenses and other current assets     416        151      Current liabilities other     9,026        14,017   

Interest rate contracts

                  Liabilities other     1,663        1,184   

Foreign exchange contracts

 

Prepaid expenses and other current assets

           7,558      Current liabilities other     67        15   
   

 

 

   

 

 

     

 

 

   

 

 

 
      416        7,709          10,756        15,216   

Derivatives not designated

as hedging instruments

 

Yen in millions

 
 

Balance sheet location

  Fair value    

Balance sheet location

  Fair value  
      March 31         March 31  
 

Asset derivatives

      2011             2012        

Liability derivatives

      2011             2012      

Interest rate contracts

 

Prepaid expenses and other current assets

    314        5      Current liabilities other     3,630        4,390   

Interest rate contracts

                  Liabilities other              

Foreign exchange contracts

 

Prepaid expenses and other current assets

    14,353        10,798      Current liabilities other     19,361        21,612   

Foreign exchange contracts

  Assets other     9        5                   

Credit contracts

 

Prepaid expenses and other current assets

    18        1      Current liabilities other     12          
   

 

 

   

 

 

     

 

 

   

 

 

 
      14,694        10,809          23,003        26,002   
   

 

 

   

 

 

     

 

 

   

 

 

 

Total derivatives

      15,110        18,518          33,759        41,218   
   

 

 

   

 

 

     

 

 

   

 

 

 

 

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Presented below are the effects of derivative instruments on the consolidated statements of income for the fiscal years ended March 31, 2010, 2011 and 2012 (yen in millions).

 

Derivatives under fair value

hedging relationships

 

Location of gain or (loss) recognized
in income on derivative

   Amount of gain or (loss)
recognized in income on
derivative
 
     Fiscal year ended March 31  
     2010     2011     2012  

Interest rate contracts

  Financial services revenue      (3,475     588        (2,998

Foreign exchange contracts

 

Foreign exchange gain or (loss), net

     97        (18     (49
    

 

 

   

 

 

   

 

 

 

Total

       (3,378     570        (3,047
    

 

 

   

 

 

   

 

 

 

 

Derivatives under
cash flow
hedging relationships

  Yen in millions  
  Fiscal year ended March 31, 2011  
  Amount of
gain or (loss)
recognized in
OCI on derivative
   

Gain or (loss) reclassified from
accumulated OCI into income

(effective portion)

   

Gain or (loss) recognized in
income on derivative
(ineffective portion)

 
  Amount    

Location

  Amount    

Location

  Amount  

Interest rate contracts

    (108   Interest expense     329      Interest expense         —   
 

 

 

     

 

 

     

 

 

 

Total

    (108  

Total

    329     

Total

      
 

 

 

     

 

 

     

 

 

 

Derivatives under
cash flow
hedging relationships

  Yen in millions  
  Fiscal year ended March 31, 2012  
  Amount of
gain or (loss)
recognized in
OCI on derivative
   

Gain or (loss) reclassified from
accumulated OCI into income
(effective portion)

   

Gain or (loss) recognized in
income on derivative

(ineffective portion)

 
  Amount    

Location

  Amount    

Location

  Amount  

Interest rate contracts

    171      Interest expense     308      Interest expense         —   
 

 

 

     

 

 

     

 

 

 

Total

    171     

Total

    308     

Total

      
 

 

 

     

 

 

     

 

 

 

At March 31, 2012, amounts related to derivatives qualifying as cash flow hedges amounted to a net reduction of equity of 1,050 million yen.

 

Derivatives not designated
as hedging instruments

 

Location of gain or
(loss) recognized in
income on derivative

  Amount of gain or (loss)
recognized in income on
derivative (Yen in millions)
 
    Fiscal year ended March 31  
        2010             2011             2012      

Interest rate contracts

  Financial services revenue     (884     (3,332     (3,303

Interest rate contracts

  Financial services expenses     32        32          

Foreign exchange contracts

  Financial services revenue     1,468        (1,294     (79

Foreign exchange contracts

  Foreign exchange gain or (loss), net     (8,779     8,311        4,324   

Equity contracts

  Financial services revenue     83                 

Bond contracts

  Financial services revenue     68        44          

Credit contracts

  Financial services revenue     (518     (101     (25
   

 

 

   

 

 

   

 

 

 

Total

      (8,530     3,660        917   
   

 

 

   

 

 

   

 

 

 

 

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The following table summarizes additional information, including notional amounts, for each type of derivative:

 

     Yen in millions  
     March 31, 2011     March 31, 2012  
     Notional
amount
     Fair value     Notional
amount
     Fair value  

Foreign exchange contracts:

          

Foreign exchange forward contracts

     1,364,147         (8,825     1,227,889         (7,305

Currency option contracts purchased

     5,822         19        9,878         91   

Currency option contracts written

     423         (9     152         (1

Currency swap agreements

     117,028         2,015        519,041         2,206   

Other currency contracts

     46,201         1,734        48,347         1,743   

Interest rate contracts:

          

Interest rate swap agreements

     448,353         (13,589     451,416         (19,435

Credit contracts:

          

Credit default swap agreements

     4,841         6        1,367         1   

 

15. Pension and severance plans

Upon terminating employment, employees of Sony Corporation and its subsidiaries in Japan are entitled, under most circumstances, to lump-sum indemnities or pension payments as described below. In July 2004, Sony Corporation and certain of its subsidiaries amended their pension plans and introduced a point-based plan under which a point is added every year reflecting the individual employee’s performance over that year. Under the point-based plan, the amount of payment is determined based on the sum of cumulative points from past services and interest points earned on the cumulative points regardless of whether or not the employee is voluntarily retiring.

Under the plans, in general, the defined benefits cover 65% of the indemnities under existing regulations to employees. The remaining indemnities are covered by severance payments by the companies. The pension benefits are payable at the option of the retiring employee either in a lump-sum amount or monthly pension payments. Contributions to the plans are funded through several financial institutions in accordance with the applicable laws and regulations.

From April 1, 2012, Sony Corporation and substantially all of its subsidiaries in Japan have modified existing defined benefit pension plans such that life annuities will no longer accrue additional service benefits, with those participants instead accruing fixed-term annuities. The defined benefit pension plans were closed to new participants and a defined contribution plan was also introduced. The changes have no impact on Sony’s results of operations and financial position as of and for the fiscal year ended March 31, 2012.

In addition, several of Sony’s foreign subsidiaries have defined benefit pension plans or severance indemnity plans, which cover substantially all of their employees. Under such plans, the related cost of benefits is currently funded or accrued. Benefits awarded under these plans are based primarily on the current rate of pay and length of service.

 

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The components of net periodic benefit costs for the fiscal years ended March 31, 2010, 2011 and 2012 were as follows:

Japanese plans:

 

     Yen in millions  
     Fiscal year ended March 31  
     2010     2011     2012  

Service cost

     30,980        29,589        29,774   

Interest cost

     15,402        16,067        15,196   

Expected return on plan assets

     (16,969     (17,987     (15,401

Recognized actuarial loss

     16,000        11,802        12,219   

Amortization of prior service costs

     (10,391     (10,391     (10,380
  

 

 

   

 

 

   

 

 

 

Net periodic benefit costs

     35,022        29,080        31,408   
  

 

 

   

 

 

   

 

 

 

Foreign plans:

 

     Yen in millions  
     Fiscal year ended March 31  
     2010     2011     2012  

Service cost

     3,645        4,160        3,348   

Interest cost

     12,083        11,165        10,082   

Expected return on plan assets

     (8,652     (9,135     (9,049

Amortization of net transition asset

     67        20        139   

Recognized actuarial loss

     857        2,911        2,771   

Amortization of prior service costs

     30        (32     (448

Losses (gains) on curtailments and settlements

     1,766        (31     1,111   
  

 

 

   

 

 

   

 

 

 

Net periodic benefit costs

     9,796        9,058        7,954   
  

 

 

   

 

 

   

 

 

 

The estimated net actuarial loss, prior service cost and obligation (asset) existing at transition for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit costs over the next fiscal year are 11,262 million yen, 10,671 million yen and 59 million yen, respectively.

 

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The changes in the benefit obligation and plan assets as well as the funded status and composition of amounts recognized in the consolidated balance sheets were as follows:

 

     Japanese plans     Foreign plans  
     Yen in millions     Yen in millions  
     March 31     March 31  
     2011     2012     2011     2012  

Change in benefit obligation:

        

Benefit obligation at beginning of the fiscal year

     709,554        735,853        231,341        206,497   

Service cost

     29,589        29,774        4,160        3,348   

Interest cost

     16,067        15,196        11,165        10,082   

Plan participants’ contributions

                   764        684   

Amendments

            (1,119     (6,677     440   

Actuarial (gain) loss

     6,424        25,098        (6,869     12,376   

Foreign currency exchange rate changes

                   (16,994     (3,273

Curtailments and settlements

     (404     (301     (166     (577

Effect of changes in consolidated subsidiaries

            8,852               3,104   

Benefits paid

     (25,377     (24,294     (10,227     (11,040
  

 

 

   

 

 

   

 

 

   

 

 

 

Benefit obligation at end of the fiscal year

     735,853        789,059        206,497        221,641   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in plan assets:

        

Fair value of plan assets at beginning of the fiscal year

     515,701        536,648        134,226        140,387   

Actual return on plan assets

     4,327        18,447        10,930        11,421   

Foreign currency exchange rate changes

                   (9,121     (1,872

Employer contribution

     34,892        15,745        13,029        9,033   

Plan participants’ contributions

                   764        684   

Curtailments and settlements

                   (217     (1,386

Effect of changes in consolidated subsidiaries

            4,592               2,331   

Benefits paid

     (18,272     (19,185     (9,224     (9,459
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of plan assets at end of the fiscal year

     536,648        556,247        140,387        151,139   
  

 

 

   

 

 

   

 

 

   

 

 

 

Funded status at end of the fiscal year

     (199,205     (232,812     (66,110     (70,502
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts recognized in the consolidated balance sheets consist of:

  

   
     Japanese plans     Foreign plans  
     Yen in millions     Yen in millions  
     March 31     March 31  
     2011     2012     2011     2012  

Noncurrent assets

     1,454        1,769        3,894        4,399   

Current liabilities

                   (2,716     (2,943

Noncurrent liabilities

     (200,659     (234,581     (67,288     (71,958
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

     (199,205     (232,812     (66,110     (70,502
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Amounts recognized in accumulated other comprehensive income, excluding tax effects, consist of:

 

     Japanese plans     Foreign plans  
     Yen in millions     Yen in millions  
     March 31     March 31  
     2011     2012     2011     2012  

Prior service cost (credit)

     (86,470     (75,840     (3,930     (2,933

Net actuarial loss

     278,895        292,382        33,919        38,196   

Obligation existing at transition

                   204        52   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

     192,425        216,542        30,193        35,315   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accumulated benefit obligations for all defined benefit pension plans were as follows:

 

     Japanese plans      Foreign plans  
     Yen in millions      Yen in millions  
     March 31      March 31  
     2011      2012      2011      2012  

Accumulated benefit obligations

     731,666         786,679         183,954         189,360   

The projected benefit obligations, the accumulated benefit obligations and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were as follows:

 

     Japanese plans      Foreign plans  
     Yen in millions      Yen in millions  
     March 31      March 31  
     2011      2012      2011      2012  

Projected benefit obligations

     729,691         781,983         176,755         170,314   

Accumulated benefit obligations

     725,504         779,604         167,609         163,002   

Fair value of plan assets

     530,300         549,017         121,338         111,667   

Weighted-average assumptions used to determine benefit obligations as of March 31, 2011 and 2012 were as follows:

 

     Japanese plans     Foreign plans  
     March 31     March 31  
         2011             2012             2011             2012      

Discount rate

     2.1     1.9     5.2     4.7

Rate of compensation increase

     *        *        3.5        3.5   

 

* Substantially all of Sony’s Japanese pension plans were point-based. Point-based plans do not incorporate a measure of compensation rate increases.

Weighted-average assumptions used to determine the net periodic benefit costs for the fiscal years ended March 31, 2010, 2011 and 2012 were as follows:

 

     Japanese plans     Foreign plans  
     Fiscal year ended March 31     Fiscal year ended March 31  
     2010     2011     2012     2010     2011     2012  

Discount rate

     2.2     2.3     2.1     6.5     5.5     5.2

Expected return on plan assets

     3.6        2.9        3.0        6.5        5.9        6.5   

Rate of compensation increase

     2.7        *        *        3.2        4.0        3.5   

 

* As of March 31, 2011 and 2012, substantially all of Sony’s Japanese pension plans were point-based. Point-based plans do not incorporate a measure of compensation rate increases.

 

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Sony reviews these assumptions for changes in circumstances.

The weighted-average rate of compensation increase is calculated based only on the pay-related plans. The point-based plans discussed above are excluded from the calculation because payments made under the plan are not based on employee compensation.

To determine the expected long-term rate of return on pension plan assets, Sony considers the current and expected asset allocations, as well as the historical and expected long-term rates of returns on various categories of plan assets. Sony’s pension investment policy recognizes the expected growth and the variability risk associated with the long-term nature of pension liabilities, the returns and risks of diversification across asset classes, and the correlation among assets. The asset allocations are designed to maximize returns consistent with levels of liquidity and investment risk that are considered prudent and reasonable. While the pension investment policy gives appropriate consideration to recent market performance and historical returns, the investment assumptions utilized by Sony are designed to achieve a long-term return consistent with the long-term nature of the corresponding pension liabilities.

The investment objectives of Sony’s plan assets are designed to generate returns that will enable the plans to meet their future obligations. The precise amount for which these obligations will be settled depends on future events, including the retirement dates and life expectancy of the plans’ participants. The obligations are estimated using actuarial assumptions, based on the current economic environment and other pertinent factors. Sony’s investment strategy balances the requirement to generate returns, using potentially higher yielding assets such as equity securities, with the need to control risk in the portfolio with less volatile assets, such as fixed-income securities. Risks include, among others, inflation, volatility in equity values and changes in interest rates that could negatively impact the funding level of the plans, thereby increasing its dependence on contributions from Sony. To mitigate any potential concentration risk, thorough consideration is given to balancing the portfolio among industry sectors and geographies, taking into account interest rate sensitivity, dependence on economic growth, currency and other factors that affect investment returns. The target allocations as of March 31, 2012, are, as a result of Sony’s asset liability management, 28% of equity securities, 58% of fixed income securities and 14% of other investments for the pension plans of Sony Corporation and most of its subsidiaries in Japan, and, on a weighted average basis, 46% of equity securities, 39% of fixed income securities and 15% of other investments for the pension plans of foreign subsidiaries.

 

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The fair values of the assets held by Japanese and foreign plans, which are classified in accordance with the fair value hierarchy described in Note 2, are as follows:

 

     Japanese plans  
     Yen in millions  
      Fair value
at March 31,

2011
     Fair value measurements
using inputs considered as
 

Asset class

      Level 1      Level 2      Level 3  

Cash and cash equivalents

     25,151         25,151                   

Equity:

           

Equity securities(a)

     127,695         125,692         2,003           

Fixed income:

           

Government bonds(b)

     226,183                 226,183           

Corporate bonds(c)

     23,375                 23,375           

Asset-backed securities(d)

     3,451                 3,451           

Commingled funds(e)

     63,693                 63,693           

Commodity funds(f)

     1,991                 1,991           

Private equity(g)

     19,888                         19,888   

Hedge funds(h)

     43,688                         43,688   

Real estate

     1,533                         1,533   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     536,648         150,843         320,696         65,109   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Japanese plans  
     Yen in millions  
     Fair value
at March 31,

2012
     Fair value measurements
using inputs considered as
 

Asset class

      Level 1      Level 2      Level 3  

Cash and cash equivalents

     14,586         14,586                   

Equity:

           

Equity securities(a)

     130,283         127,918         2,365           

Fixed income:

           

Government bonds(b)

     255,010                 255,010           

Corporate bonds(c)

     23,853                 23,853           

Asset-backed securities(d)

     4,722                 4,722           

Commingled funds(e)

     58,862                 58,862           

Commodity funds(f)

     1,850                 1,850           

Private equity(g)

     23,388                         23,388   

Hedge funds(h)

     42,258                         42,258   

Real estate

     1,435                         1,435   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     556,247         142,504         346,662         67,081   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Includes approximately 64 percent and 65 percent of Japanese equity securities, and 36 percent and 35 percent of foreign equity securities for the fiscal years ended March 31, 2011 and 2012, respectively.

 

(b) Includes approximately 65 percent and 64 percent of debt securities issued by Japanese national and local governments, and 35 percent and 36 percent of debt securities issued by foreign national and local governments for the fiscal years ended March 31, 2011 and 2012, respectively.

 

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(c) Includes debt securities issued by Japanese and foreign corporation and government related agencies.

 

(d) Includes primarily mortgage-backed securities.

 

(e) Commingled funds represent pooled institutional investments, including primarily investment trusts. They include approximately 39 percent and 42 percent of investments in equity, 58 percent and 56 percent of investments in fixed income, and 3 percent and 2 percent of investments in other for the fiscal years ended March 31, 2011 and 2012, respectively.

 

(f) Represents commodity futures funds.

 

(g) Includes multiple private equity funds of funds that primarily invest in venture, buyout, and distressed markets in the U.S. and Europe.

 

(h) Includes primarily funds that invest in a portfolio of a broad range of hedge funds to diversify the risks and reduce the volatilities associated with a single hedge fund.

 

     Foreign plans  
     Yen in millions  
     Fair value
at March 31,

2011
     Fair value measurements
using inputs considered as
 

Asset class

      Level 1      Level 2      Level 3  

Cash and cash equivalents

     860         860                   

Equity:

           

Equity securities(a)

     38,512         33,273         5,239           

Fixed income:

           

Government bonds(b)

     21,405                 21,405           

Corporate bonds(c)

     14,994                 10,148         4,846   

Asset-backed securities

     2,053                 2,053           

Insurance contracts(d)

     6,718                 6,718           

Commingled funds(e)

     50,517                 49,987         530   

Real estate and other(f)

     5,328         45         1,510         3,773   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     140,387         34,178         97,060         9,149   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Foreign plans  
     Yen in millions  
     Fair value
at March 31,

2012
     Fair value measurements
using inputs considered as
 

Asset class

      Level 1      Level 2      Level 3  

Cash and cash equivalents

     859         859                   

Equity:

           

Equity securities(a)

     36,497         30,514         5,983           

Fixed income:

           

Government bonds(b)

     43,504                 43,504           

Corporate bonds(c)

     9,192                 5,231         3,961   

Asset-backed securities

     648                 648           

Insurance contracts(d)

     9,283                 9,283           

Commingled funds(e)

     43,902                 43,902           

Real estate and other(f)

     7,254         20         2,151         5,083   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     151,139         31,393         110,702         9,044   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Includes primarily foreign equity securities.

 

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(b) Includes primarily foreign government debt securities.

 

(c) Includes primarily foreign corporate debt securities.

 

(d) Represents annuity contracts with or without profit sharing.

 

(e) Commingled funds represent pooled institutional investments including mutual funds, common trust funds, and collective investment funds. They are primarily comprised of foreign equities and fixed income investments.

 

(f) Includes primarily private real estate investment trusts.

Each level in the fair value hierarchy in which each plan asset is classified is determined based on inputs used to measure the fair values of the asset, and does not necessarily indicate the risks or rating of the asset.

The following is a description of the valuation techniques used to measure Japanese and foreign plan assets at fair value. There were no changes in valuation techniques during the fiscal years ended March 31, 2011 and 2012.

Equity securities are valued at the closing price reported in the active market in which the individual securities are traded. These assets are generally classified as level 1.

The fair value of fixed income securities is typically estimated using pricing models, quoted prices of securities with similar characteristics or discounted cash flows and are generally classified as level 2.

Commingled funds are typically valued using the net asset value provided by the administrator of the fund and reviewed by Sony. The net asset value is based on the value of the underlying assets owned by the fund, minus liabilities and divided by the number of shares or units outstanding. These assets are classified as level 1, level 2 or level 3 depending on availability of quoted market prices.

Commodity funds are valued using inputs that are derived principally from or corroborated by observable market data. These assets are generally classified as level 2.

Private equity and private real estate investment trust valuations require significant judgment due to the absence of quoted market prices, the inherent lack of liquidity and the long-term nature of such assets. These assets are initially valued at cost and are reviewed periodically utilizing available and relevant market data to determine if the carrying value of these assets should be adjusted. These investments are classified as level 3. The valuation methodology is applied consistently from period to period.

Hedge funds are valued using the net asset value as determined by the administrator or custodian of the fund. These investments are classified as level 3.

 

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The following table sets forth a summary of changes in the fair values of Japanese and foreign plans’ level 3 assets for the fiscal years ended March 31, 2011 and 2012:

 

     Japanese plans  
     Yen in millions  
     Fair value measurement using significant unobservable inputs
(Level 3)
 
     Private equity     Hedge funds     Real estate     Total  

Beginning balance at April 1, 2010

     21,337        51,498        1,655        74,490   

Return on assets held at end of year

     (1,449     2,467        (122     896   

Return on assets sold during the year

            (436            (436

Purchases, sales, and settlements, net

            (9,841            (9,841

Transfers, net

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2011

     19,888        43,688        1,533        65,109   
  

 

 

   

 

 

   

 

 

   

 

 

 

Return on assets held at end of year

     450        470        (98     822   

Return on assets sold during the year

                            

Purchases, sales, and settlements, net

     3,050        (1,900            1,150   

Transfers, net

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2012

     23,388        42,258        1,435        67,081   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Foreign plans  
     Yen in millions  
     Fair value measurement using significant unobservable inputs (Level 3)  
     Corporate
bonds
    Asset-backed
securities
    Commingled
funds
    Real estate
and other
    Total  

Beginning balance at April 1, 2010

     4,571        75        528        3,777        8,951   

Return on assets held at end of year

     503               9        490        1,002   

Return on assets sold during the year

                    5                      5   

Purchases, sales, and settlements, net

     260        (72            (159     29   

Transfers, net

                                   

Other*

     (488     (8     (7     (335     (838
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2011

     4,846               530        3,773        9,149   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Return on assets held at end of year

     447                      558        1,005   

Return on assets sold during the year

                                   

Purchases, sales, and settlements, net

     (1,209            (530     156        (1,583

Transfers, net

                                   

Other*

     (123                   596        473   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2012

     3,961                      5,083        9,044   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* Primarily consists of translation adjustments.

Sony makes contributions to its defined benefit pension plans as deemed appropriate by management after considering the fair value of plan assets, expected return on plan assets and the present value of benefit obligations. Sony expects to contribute approximately 18 billion yen to the Japanese plans and approximately 9 billion yen to the foreign plans during the fiscal year ending March 31, 2013. At the end of the fiscal year

 

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ended March 31, 2011, Sony had expected to contribute approximately 35 billion yen to the Japanese plans. However, Sony actually contributed 16 billion yen to the plans in the fiscal year ended March 31, 2012.

The expected future benefit payments are as follows:

 

     Japanese plans      Foreign plans  

Fiscal year ending March 31

   Yen in millions      Yen in millions  

2013

     26,197         9,418   

2014

     28,084         9,485   

2015

     30,972         10,461   

2016

     33,553         10,163   

2017

     34,518         10,827   

2018 — 2022

     209,895         58,880   

 

16. Stockholders’ equity

 

(1) Common stock:

Changes in the number of shares of common stock issued and outstanding during the fiscal years ended March 31, 2010, 2011 and 2012 have resulted from the following:

 

     Number of
shares
 

Balance at March 31, 2009

     1,004,535,364   

Exercise of stock acquisition rights

     36,100   
  

 

 

 

Balance at March 31, 2010

     1,004,571,464   

Exercise of stock acquisition rights

     65,200   
  

 

 

 

Balance at March 31, 2011

     1,004,636,664   

Exercise of stock acquisition rights

     1,500   
  

 

 

 

Balance at March 31, 2012

     1,004,638,164   
  

 

 

 

At March 31, 2012, 22,417,400 shares of common stock would be issued upon the conversion or exercise of all convertible bonds and stock acquisition rights outstanding.

Conversions of convertible bonds into common stock are accounted for in accordance with the provisions of the Companies Act of Japan (Kaishaho) and related regulations (collectively the “Companies Act”) by crediting approximately one-half of the conversion proceeds to the common stock account and the remainder to the additional paid-in capital account.

Sony Corporation may purchase its own shares at any time by a resolution of the Board of Directors up to the retained earnings available for dividends to shareholders, in accordance with the Companies Act. No common stock had been acquired by the resolution of the Board of Directors during the fiscal years ended March 31, 2010, 2011 and 2012.

 

(2) Retained earnings:

The amount of statutory retained earnings of Sony Corporation available for dividends to shareholders as of March 31, 2012 was 310,522 million yen. The appropriation of retained earnings for the fiscal year ended March 31, 2012, including cash dividends for the six-month period ended March 31, 2012, has been incorporated

 

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in the accompanying consolidated financial statements. This appropriation of retained earnings was approved at the meeting of the Board of Directors of Sony Corporation held on May 9, 2012 and was then recorded in the statutory books of account, in accordance with the Companies Act.

Retained earnings include Sony’s equity in undistributed earnings of affiliated companies accounted for by the equity method in the amount of 30,809 million yen and 7,891 million yen at March 31, 2011 and 2012, respectively.

 

(3) Other comprehensive income:

Other comprehensive income for the fiscal years ended March 31, 2010, 2011 and 2012 were comprised of the following:

 

     Yen in millions  
     Pre-tax amount     Tax
benefit/(expense)
    Net-of-tax
amount
 

For the fiscal year ended March 31, 2010:

      

Unrealized gains (losses) on securities, net —

      

Unrealized holding gains arising during the period*

     74,501        (22,469     33,502   

Less : Reclassification adjustment included in net income

     (1,896     661        (1,235

Unrealized gains (losses) on derivative instruments, net —

      

Unrealized holding gains arising during the period

     2,040        (415     1,625   

Less : Reclassification adjustment included in net income

     (566     489        (77

Pension liability adjustment*

     45,767        (22,074     23,720   

Foreign currency translation adjustments —

      

Translation adjustments arising during the period

     4,583        (22     4,561   

Less : Reclassification adjustment included in net income

     2,289               2,289   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income

     126,718        (43,830     64,385   
  

 

 

   

 

 

   

 

 

 

 

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     Yen in millions  
     Pre-tax amount     Tax
benefit/(expense)
    Net-of-tax
amount
 

For the fiscal year ended March 31, 2011:

      

Unrealized gains (losses) on securities, net —

      

Unrealized holding losses arising during the period*

     (42,311     12,996        (25,445

Less : Reclassification adjustment included in net income

     21,548        (8,104     13,444   

Unrealized gains (losses) on derivative instruments, net —

      

Unrealized holding losses arising during the period

     (662     52        (610

Less : Reclassification adjustment included in net income

     (785     (158     (943

Pension liability adjustment*

     3,164        (6,463     (3,176

Foreign currency translation adjustments —

      

Translation adjustments arising during the period

     (118,840     1,256        (117,584

Less : Reclassification adjustment included in net income

     (832            (832
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (138,718     (421     (135,146
  

 

 

   

 

 

   

 

 

 
     Yen in millions  
     Pre-tax amount     Tax
benefit/(expense)
    Net-of-tax
amount
 

For the fiscal year ended March 31, 2012:

      

Unrealized gains (losses) on securities, net —

      

Unrealized holding gains arising during the period*

     28,712        (10,162     12,369   

Less : Reclassification adjustment included in net income

     3,417        (1,240     2,177   

Unrealized gains (losses) on derivative instruments, net —

      

Unrealized holding losses arising during the period

     (177     (70     (247

Less : Reclassification adjustment included in net income

     911        (125     786   

Pension liability adjustment*

     (29,239     (3,934     (34,668

Foreign currency translation adjustments —

      

Translation adjustments arising during the period*

     (32,640     74        (32,961

Less : Reclassification adjustment included in net income

     14,655               14,655   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (14,361     (15,457     (37,889
  

 

 

   

 

 

   

 

 

 

 

* Amounts allocable to the noncontrolling interests in the equity of a subsidiary and other are deducted from the net-of-tax amount for unrealized holding gains on securities, pension liability adjustment and foreign currency translation adjustments arising during the period.

 

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During the fiscal years ended March 31, 2010, 2011 and 2012, losses of 2,289 million yen, gains of 832 million yen and losses of 14,655 million yen, respectively, of foreign currency translation adjustments were transferred from accumulated other comprehensive income to net income as a result of the liquidation or sale of certain foreign subsidiaries and affiliates. The amount transferred during the fiscal year ended March 31, 2012 includes losses of 12,772 million yen as a result of the other-than-temporary impairment loss on the shares of S-LCD. Refer to Note 5.

 

17. Stock-based compensation plans

The stock-based compensation expense for the fiscal years ended March 31, 2010, 2011 and 2012 was 2,202 million yen, 1,952 million yen and 1,952 million yen, respectively. The income tax benefit related to the stock-based compensation expense for the fiscal years ended March 31, 2010, 2011 and 2012 was 271 million yen, 322 million yen and 287 million yen, respectively. The total cash received from exercises under all of the stock-based compensation plans during the fiscal years ended March 31, 2010, 2011 and 2012 was 114 million yen, 198 million yen and 4 million yen, respectively. Sony issued new shares upon exercise of these rights. The actual income tax benefit realized for tax deductions from exercises under all the stock-based compensation plans for the fiscal years ended March 31, 2010, 2011 and 2012 was insignificant.

Sony has three types of stock-based compensation plans as incentive plans for selected directors, corporate executive officers and employees.

 

(1) Stock Acquisition Rights plan:

Sony has an equity-based compensation plan that issues common stock acquisition rights for the purpose of granting stock options to selected directors, corporate executive officers and employees of Sony, pursuant to the Companies Act. The stock acquisition rights generally vest ratably over a period of three years and are exercisable up to ten years from the date of grant.

The weighted-average fair value per share at the date of grant of stock acquisition rights granted during the fiscal years ended March 31, 2010, 2011 and 2012 was 813 yen, 1,036 yen and 345 yen, respectively. The fair value of stock acquisition rights granted on the date of grant and used to recognize compensation expense for the fiscal years ended March 31, 2010, 2011 and 2012 was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

     Fiscal year ended March 31  
           2010                 2011                 2012        

Weighted-average assumptions

      

Risk-free interest rate

     2.08     1.60     1.08

Expected lives

     6.49 years      6.64 years      6.77 years 

Expected volatility*

     33.70     35.74     36.88

Expected dividends

     0.99     0.83     1.85

 

  * Expected volatility was based on the historical volatilities of Sony Corporation’s common stock over the expected life of the stock acquisition rights.

 

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A summary of the activities regarding the stock acquisition rights plan during the fiscal year ended March 31, 2012 is as follows:

 

     Fiscal year ended March 31, 2012  
     Number of
shares
     Weighted-
average
exercise price
     Weighted-
average
remaining life
     Total
intrinsic
value
 
            Yen      Years      Yen in millions  

Outstanding at beginning of the fiscal year

     17,011,400         3,458         

Granted

     2,537,500         1,520         

Exercised

     1,500         2,347         

Forfeited or expired

     667,100         3,326         
  

 

 

          

Outstanding at end of the fiscal year

     18,880,300         3,188         5.78         336   
  

 

 

          

Exercisable at end of the fiscal year

     13,952,100         3,548         4.64           
  

 

 

          

The total intrinsic value of shares exercised under the stock acquisition rights plan during the fiscal years ended March 31, 2010, 2011 and 2012 was 20 million yen, 26 million yen and 0.2 million yen, respectively.

As of March 31, 2012, there was 1,425 million yen of total unrecognized compensation expense related to nonvested stock acquisition rights. This expense is expected to be recognized over a weighted-average period of 2.01 years.

 

(2) Convertible Bonds plan:

Sony had an equity-based compensation plan for selected executives of Sony’s U.S. subsidiaries using U.S. dollar-denominated non-interest bearing convertible bonds, which had characteristics similar to that of an option plan. Each convertible bond could be converted into 100 shares of the common stock of Sony Corporation at an exercise price based on the prevailing market rate shortly before the date of grant. The convertible bonds vested ratably over a three-year period and were exercisable up to ten years from the date of grant. As the convertible bonds were issued in exchange for a non-interest bearing employee loan and a right of offset exists between the convertible bonds and the employee loans, no accounting recognition was given to either the convertible bonds or the employee loans in Sony’s consolidated balance sheets.

A summary of the activities regarding the convertible bond plan during the fiscal year ended March 31, 2012 is as follows:

 

     Fiscal year ended March 31, 2012  
     Number of shares     Weighted-average
exercise price
 
           Yen  

Outstanding at beginning of the fiscal year

     548,500        6,931   

Expired

     (548,500     6,931   
  

 

 

   

Outstanding at end of the fiscal year

         
  

 

 

   

There were no shares granted or exercised under the convertible bond plan during the fiscal years ended March 31, 2010, 2011 and 2012. At March 31, 2012, the remaining exercisable shares expired under this plan and there are no further shares outstanding or exercisable under the convertible bond plan as of March 31, 2012.

 

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(3) Stock Appreciation Rights (“SARs”) plan:

Sony granted SARs in the United States of America for selected employees. Under the terms of these plans, employees upon exercise of such rights receive cash equal to the amount that the market price of Sony Corporation’s common stock exceeds the strike price of the SARs. The SARs generally vest ratably over a period of three years, and are generally exercisable up to ten years from the date of grant.

There were no SARs granted during the fiscal years ended March 31, 2010, 2011 and 2012. As of March 31, 2012, there were 23,200 SARs outstanding and the weighted-average exercise price was 4,298 yen. All SARs were exercisable as of March 31, 2012.

The compensation expense for the SARs is measured as the excess of the quoted market price of Sony Corporation’s common stock over the SARs strike price. SAR compensation expense for the fiscal years ended March 31, 2010, 2011, and 2012 was insignificant.

 

18. Great East Japan Earthquake and Thai Floods

 

(1) Great East Japan Earthquake

On March 11, 2011, Japan experienced a massive earthquake and tsunami (the “Great East Japan Earthquake”). The disaster caused significant damage to certain fixed assets including buildings, machinery and equipment as well as inventories in manufacturing sites and warehouses located principally in northeastern Japan.

For the fiscal year ended March 31, 2011, Sony incurred incremental losses and expenses including repair, removal and cleaning costs directly related to the damage caused by the disaster of 10,897 million yen, including the disposal or impairment of fixed assets of 7,668 million yen. These losses and expenses were primarily recorded in other operating (income) expense, net in the consolidated statements of income and were offset by insurance recoveries of 10,841 million yen, the amount that was deemed probable up to the extent of the corresponding losses recognized, as described below. The restoration costs anticipated to occur on or after April 1, 2011 were not recorded in the period ended March 31, 2011. In addition, Sony also incurred other losses and expenses of 11,821 million yen, which included idle facility costs at manufacturing sites, and an additional provision for life insurance policy reserves. These losses and expenses were primarily recorded in cost of sales and financial services expenses in the consolidated statements of income.

For the fiscal year ended March 31, 2012, Sony incurred incremental losses and expenses including repair, removal, restoration and cleaning costs directly related to the damage caused by the disaster of 5,864 million yen. These losses and expenses were primarily recorded in cost of sales in the consolidated statements of income and were partially offset by insurance recoveries of 2,159 million yen, as described below. In addition, Sony also incurred other losses and expenses of 6,294 million yen, which included idle facility costs at manufacturing sites. These losses and expenses were primarily recorded in cost of sales in the consolidated statements of income.

Sony has insurance policies which cover certain damage directly caused by the Great East Japan Earthquake for Sony Corporation and certain of its subsidiaries including manufacturing sites. The insurance policies cover the damage and costs associated with fixed assets and inventories and provide business interruption coverage, including lost profits.

Insurance claims in the amount of 15,000 million yen, the total coverage amount, were agreed to by the insurance carriers as a final settlement and were paid in March 2012. Of this amount, 2,000 million yen is due to a certain carrier as reinsurance and recorded in other current liabilities in the consolidated balance sheets. The insurance proceeds are primarily included in investing activities in the consolidated statements of cash flows.

 

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(2) Thai Floods

In October 2011, certain of Sony’s Thailand subsidiaries temporarily closed operations due to significant floods (the “Floods”). The Floods caused significant damage to certain fixed assets including buildings, machinery and equipment as well as inventories in manufacturing sites and warehouses located in Thailand. In addition, the Floods impacted the operations of certain Sony subsidiaries in Japan and other countries.

For the fiscal year ended March 31, 2012, Sony incurred incremental losses and expenses including repair, removal and cleaning costs directly related to the damage caused by the Floods of 13,236 million yen, including the disposal or impairment of fixed assets of 7,882 million yen. These losses and expenses were primarily recorded in other operating (income) expense, net in the consolidated statements of income and were offset by insurance recoveries as described below. The restoration costs anticipated to occur on or after April 1, 2012 were not recorded in the fiscal year ended March 31, 2012 and will be recorded when the services are rendered and liabilities incurred. In addition, Sony also incurred other losses and expenses of 13,899 million yen, which included idle facility costs at manufacturing sites and other additional expenses. These losses and expenses were mainly recorded in cost of sales in the consolidated statements of income.

Sony has insurance policies which cover certain damage directly caused by the Floods for Sony Corporation and certain of its subsidiaries including manufacturing sites. The insurance policies cover the damage and costs associated with fixed assets, inventories and additional expenses including removal and cleaning costs and provide business interruption coverage, including lost profits.

Insurance claims in the amount of 50,416 million yen were agreed to by the insurance carriers and were paid during the fiscal year ended March 31, 2012. Of this amount, Sony received 26,316 million yen for fixed assets, inventories and additional expenses, of which 17,520 million yen represents the portion of insurance recoveries in excess of the carrying value before the damage caused by the Floods of the insured fixed assets and inventories, and were recorded in cost of sales and other operating (income) expense, net in the consolidated statements of income. The remaining amount of the insurance claims paid of 24,100 million yen was for business interruption insurance recoveries, which applies to the lost profit which occurred after the Floods to December 31, 2011, and were recorded in other operating revenue in the consolidated statements of income. The insurance proceeds for fixed assets and for other than fixed assets are included in investing activities and operating activities in the consolidated statements of cash flows, respectively.

In addition, as of March 31, 2012, Sony still had pending insurance claims for damage to fixed assets, inventories, additional expenses and business interruption. Sony recorded insurance receivables of 5,788 million yen which represents the portion of the insurance claims that were deemed probable of collection up to the extent of the amount of corresponding losses recognized in the same period and substantially all relate to damaged assets and inventories. Sony concluded that the recoveries from these insurance claims are probable based on the coverage under valid policies, communications with the insurance carriers, Sony’s past claims history with the insurance carriers, and Sony’s assessment that the insurance carriers have the financial ability to pay the claims. These receivables were primarily recorded in prepaid expenses and other current assets in the consolidated balance sheets.

 

19. Restructuring charges and asset impairments

As part of its effort to improve the performance of the various businesses, Sony has undertaken a number of restructuring initiatives. Sony defines restructuring initiatives as activities initiated by Sony, such as exiting a business or product category or implementing a headcount reduction program, which are designed to generate a positive impact on future profitability. For the fiscal years ended March 31, 2010, 2011 and 2012, Sony recorded total restructuring charges of 116,472 million yen, 62,318 million yen and 52,645 million yen, respectively.

Sony anticipates recording approximately 75 billion yen of restructuring charges for the fiscal year ending March 31, 2013.

 

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The changes in the accrued restructuring charges for the fiscal years ended March 31, 2010, 2011 and 2012 are as follows:

 

     Yen in millions  
     Employee
termination
benefits
    Non-cash
write-downs  and
disposals, net*
    Other associated
costs
    Total  

Balance at March 31, 2009

     53,813               11,461        65,274   

Restructuring costs

     65,133        31,928        19,411        116,472   

Non-cash charges

            (31,928            (31,928

Cash payments

     (88,803            (21,754     (110,557

Adjustments

     (2,925            (156     (3,081
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2010

     27,218               8,962        36,180   

Restructuring costs

     38,264        8,294        15,760        62,318   

Non-cash charges

            (8,294            (8,294

Cash payments

     (47,521            (19,086     (66,607

Adjustments

     (2,376            (662     (3,038
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2011

     15,585               4,974        20,559   

Sony Ericsson acquisition

     8,789               2,190        10,979   

Restructuring costs

     25,453        20,428        6,764        52,645   

Non-cash charges

            (20,428            (20,428

Cash payments

     (24,928            (4,862     (29,790

Adjustments

     98               (1,130     (1,032
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

     24,997               7,936        32,933   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  * Significant asset impairments excluded from restructuring charges are described below.

The total amount of costs incurred in connection with these restructuring programs by segment for the fiscal years ended March 31, 2010, 2011 and 2012 are as follows:

 

     Yen in millions  
     Fiscal year ended March 31  
     2010      2011      2012  

Consumer Products & Services

     31,255         25,532         8,972   

Professional, Device & Solutions

     41,067         19,507         25,645   

Pictures

     5,605         2,722         1,273   

Music

     5,225         2,662         5,710   

Financial Services

     5,078         5,010         1,822   

Sony Mobile*

                     537   

All Other and Corporate

     28,242         6,885         8,686   
  

 

 

    

 

 

    

 

 

 

Total net charges

     116,472         62,318         52,645   
  

 

 

    

 

 

    

 

 

 

 

  * Sony acquired Ericsson’s shares in Sony Ericsson and it became a wholly-owned subsidiary of Sony. Subsequent to the acquisition, Sony Ericsson was renamed Sony Mobile. Refer to Note 24.

In addition to the restructuring charges in the tables above, Sony recorded in cost of sales 7,851 million, 4,751 million yen and 2,115 million yen of non-cash charges related to depreciation associated with restructured assets for the fiscal years ended March 31, 2010, 2011 and 2012, respectively. Depreciation associated with

 

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restructured assets as used in the context of the disclosures regarding restructuring activity refers to the increase in depreciation expense caused by shortening the useful life or updating the salvage value of depreciable fixed assets to coincide with the end of production under an approved restructuring plan. Any impairment of the asset is recognized immediately in the period.

Consumer Products & Services segment

In an effort to improve the performance of the Consumer Products & Services segment, Sony has undergone a number of restructuring efforts to reduce its operating costs. These efforts included headcount reduction programs, initiatives to advance rationalization of manufacturing operations, shifting and aggregating manufacturing to low-cost areas, and utilizing the services of third-party original equipment and design manufacturers (OEMs and ODMs). Significant restructuring activities are as follows:

Retirement programs -

In an effort to improve the performance of the Consumer Products & Services segment, Sony has undergone several headcount reduction programs to further reduce operating costs. Through measures including the realignment of its manufacturing sites, a review of its development and design structure, and the streamlining of its sales and administrative functions, Sony has continued to implement a company-wide (including headquarters) rationalization. Sony intends to reallocate and optimize its workforce through programs including work reassignments and outplacements. As a result of these measures, Sony recorded in the Consumer Products & Services segment restructuring charges related mainly to employee termination benefits totaling 20,189 million yen, 14,035 million yen and 8,134 million yen for the fiscal years ended March 31, 2010, 2011 and 2012, respectively, in selling, general and administrative expenses in the consolidated statements of income. These staff reductions were achieved worldwide mostly through the implementation of early retirement programs. Sony will continue to implement programs to reduce headcount by streamlining business operations, including closure and consolidation of manufacturing sites, and the consolidation of headquarters and administrative functions.

Realignment of manufacturing operations in Japan -

During the fiscal year ended March 31, 2010, Sony implemented extensive measures to better compete in terms of speed to market and profitability, including the reevaluation of both its domestic and overseas manufacturing operations. As part of this process, manufacturing operations in Japan for certain product categories were consolidated in order to increase the efficiency of these manufacturing operations.

As a result of this realignment of manufacturing operations in Japan, restructuring charges for the closure of production facilities totaling 7,132 million yen were recorded which consisted mainly of personnel related costs and the disposal or impairment of assets. Of the total restructuring charges, 3,586 million yen for employee termination benefits were recorded in selling, general and administrative expenses and 3,261 million yen for the disposal or impairment of assets was recorded in other operating (income) expense, net in the consolidated statements of income. In addition to the restructuring charges, 4,823 million yen of non-cash charges related to depreciation associated with restructured assets were recorded in cost of sales in the consolidated statements of income as a result of this realignment of manufacturing operations in Japan.

Sales and transfers of manufacturing operations outside of Japan -

During the fiscal year ended March 31, 2011, Sony sold and transferred certain manufacturing operations outside of Japan to third parties to reduce operating costs. The resulting restructuring charges included expenses of 11,583 million yen related to the transfer of a factory in Barcelona and the impairment of related assets.

Cash flows from the sales and transfers of manufacturing operations are included in sales of businesses in the consolidated statements of cash flows.

 

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Professional, Device & Solutions segment

In an effort to improve the performance of the Professional, Device & Solutions segment, Sony has undergone a number of restructuring efforts to reduce operating costs. These efforts included headcount reduction programs, initiatives to advance rationalization of manufacturing operations, shifting and aggregating manufacturing to low-cost areas, and utilizing the services of third-party original equipment and design manufacturers (OEMs and ODMs). Significant restructuring activities are as follows:

Retirement programs -

In an effort to improve the performance of the Professional, Device & Solutions segment, Sony has undergone several headcount reduction programs to further reduce operating costs. Through measures including the realignment of its manufacturing sites, a review of its development and design structure, and the streamlining of its sales and administrative functions, Sony has continued to implement a company-wide (including headquarters) rationalization. Sony intends to reallocate and optimize its workforce through programs including work reassignments and outplacements. As a result of these measures, Sony recorded in the Professional, Device & Solutions segment restructuring charges related mainly to employee termination benefits totaling 23,002 million yen, 14,073 million yen and 6,925 million yen for the fiscal years ended March 31, 2010, 2011 and 2012, respectively, in selling, general and administrative expenses in the consolidated statements of income. These staff reductions were achieved worldwide mostly through the implementation of early retirement programs. Sony will continue to implement programs to reduce headcount by streamlining business operations, including closure and consolidation of manufacturing sites, and the consolidation of headquarters and administrative functions.

Realignment of manufacturing operations in Japan -

During the fiscal year ended March 31, 2010, Sony implemented extensive measures to better compete in terms of speed to market and profitability, including the reevaluation of both its domestic and overseas manufacturing operations. As part of this process, manufacturing operations in Japan for certain product categories were consolidated in order to increase the efficiency of these manufacturing operations.

As a result of this realignment of manufacturing operations in Japan, restructuring charges for the closure of production facilities totaling 6,087 million yen consisted mainly of personnel related costs and the disposal or impairment of assets. Of the total restructuring charges, 5,273 million yen for employee termination benefits were recorded in selling, general and administrative expenses and 455 million yen for the disposal or impairment of assets were recorded in other operating (income) expense, net in the consolidated statements of income. In addition to the restructuring charges, 799 million yen of non-cash charges related to depreciation associated with restructured assets were recorded in cost of sales in the consolidated statements of income as a result of this realignment of manufacturing operations in Japan.

Sale and asset-impairment of small- and medium-sized TFT LCD business -

In an effort to increase efficiency and strengthen operations in the small- and medium-sized TFT LCD business by consolidating manufacturing operations, Sony recorded 7,832 million yen for the impairment of TFT LCD related fixed assets for the fiscal year ended March 31, 2010. These charges were recorded in other operating (income) expense, net in the consolidated statements of income.

As described in Note 25, Sony sold its small- and medium-sized TFT LCD business to Japan Display Inc. During the fiscal year ended March 31, 2012, Sony recorded an impairment loss of 19,187 million yen in other operating (income) expense, net in the consolidated statements of income, as the long-lived assets used by the business were classified as held for sale and recorded at the lesser of carrying value or fair value.

 

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Asset-impairment of OLED related equipment -

During the fiscal year ended March 31, 2010, Sony recorded 5,265 million yen for the impairment of OLED related equipment, which was rendered obsolete due to the utilization of an alternative technology in the manufacture of OLED products. These charges were recorded in other operating (income) expense, net in the consolidated statements of income.

Pictures segment

In an effort to improve the performance of the Pictures segment, Sony has undergone a number of restructuring efforts to reduce operating costs and rationalize certain operations.

The resulting restructuring charges, included in the table above, were related mainly to employee termination benefits and included in selling, general and administrative expenses in the consolidated statements of income.

Music segment

In an effort to improve the performance of the Music segment due to the continued contraction of the physical music market, Sony has undergone a number of restructuring efforts to reduce operating costs.

The resulting restructuring charges, included in the table above, were related mainly to employee termination benefits and included in selling, general and administrative expenses in the consolidated statements of income.

Financial Services segment

In an effort to improve the performance of the Financial Services segment, Sony has undergone restructuring efforts to reduce operating costs.

During the fiscal year ended March 31, 2010, Sony recorded restructuring charges of 3,718 million yen in financial service expenses and 1,360 million yen in other operating (income) expense, net in the consolidated statements of income. These restructuring charges were related mainly to the realignment of credit financing operations and the disposal or impairment of assets. During the fiscal year ended March 31, 2011, Sony recorded restructuring charges of 3,371 million yen in financial service expenses and 1,639 million yen in other operating (income) expense, net in the consolidated statements of income. These restructuring charges related mainly to the partial sale of a leasing and credit card business.

Cash flows from the partial sale of a leasing and credit card business are included in sales of businesses in the consolidated statements of cash flows.

Sony Mobile segment

As a result of the acquisition of Sony Ericsson, which was subsequently renamed Sony Mobile, Sony reflected in the consolidated balance sheets 10,979 million yen of restructuring liabilities which related to restructuring activities undertaken by Sony Ericsson prior to Sony’s acquisition of Ericsson’s 50% equity interest in Sony Ericsson, but which had not yet been paid or settled by Sony Ericsson. The restructuring liability relates to activities previously accrued by Sony Ericsson but which were unpaid as of the acquisition date representing severance costs of 8,789 million yen and other associated costs of 2,190 million yen.

In an effort to improve the performance of the Sony Mobile segment, Sony has undergone restructuring efforts to reduce operating costs.

The resulting restructuring charges, included in the table above, were related mainly to employee termination benefits and included in selling, general and administrative expenses in the consolidated statements of income from February 16, 2012 through March 31, 2012.

 

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All Other and Corporate

Realignment of manufacturing operations in Japan -

During the fiscal year ended March 31, 2010, Sony implemented extensive measures to better compete in terms of speed to market and profitability, including the reevaluation of both its domestic and overseas manufacturing operations. As part of this process, mobile phone customer service and manufacturing operations in Japan were consolidated in order to establish an integrated operational structure from manufacturing through to customer service.

As a result of this realignment, restructuring charges for the closure of production facilities totaling 6,041 million yen were recorded, which consisted mainly of personnel related costs and the disposal or impairment of assets. Of the total restructuring charges, 4,900 million yen for employee termination benefits was recorded in selling, general and administrative expenses, and 862 million yen for the disposal or impairment of assets was recorded in other operating (income) expense, net in the consolidated statements of income. In addition to the restructuring charges, 553 million yen of non-cash charges related to depreciation associated with restructured assets were recorded in cost of sales in the consolidated statements of income.

Withdrawal from property lease contract -

During the fiscal year ended March 31, 2010, Sony withdrew from the property management operation of an entertainment complex in Japan and terminated the property lease contract. Sony recorded 6,495 million yen of termination payments in cost of sales in the consolidated statements of income.

Corporate restructuring charges related to headquarters -

During the fiscal year ended March 31, 2010, Sony underwent headquarters restructuring activities. As a result, 5,897 million yen for employee termination benefits were recorded in selling, general and administrative expenses in the consolidated statements of income for the fiscal year ended March 31, 2010.

Other asset impairment information

Asset-impairment of LCD television business related long-lived assets -

Sony recorded impairment losses of 27,100 million yen and 16,700 million yen for the fiscal years ended March 31, 2010 and 2012, respectively, included within the Consumer Products & Services segment, related to the LCD television assets group. These impairment losses primarily reflect a decrease in the estimated fair value of property, plant and equipment and certain intangible assets.

During the fiscal year ended March 31, 2010, management updated its strategic plans, which resulted in decreases in the assets’ estimated service periods and corresponding estimated future cash flows leading to the impairment loss.

During the fiscal year ended March 31, 2012, the corresponding estimated future cash flows leading to the impairment charge reflect the continued deterioration in LCD television market conditions in Japan, Europe and North America, and unfavorable foreign exchange rates.

Sony excluded these losses on impairment from restructuring charges as they were not directly related to Sony’s ongoing restructuring initiatives.

Asset-impairment of network business related long-lived assets -

Sony recorded an impairment loss of 12,601 million yen for the fiscal year ended March 31, 2012, included within the Consumer Products & Services segment, related to the network business asset group, which has made

 

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investments in network improvements and security enhancements. This impairment loss primarily reflects a decrease in the estimated fair value of certain intangible and other long-lived assets.

During the fiscal year ended March 31, 2012, the corresponding estimated future cash flows leading to the impairment charge reflect management’s revised forecast over the limited period applicable to the impairment determination.

Sony excluded this loss on impairment from restructuring charges as it was not directly related to Sony’s ongoing restructuring initiatives.

 

20. Supplemental consolidated statements of income information

 

(1) Other operating (income) expense, net:

Other operating (income) expense, net is comprised of the following:

 

     Yen in millions  
     March 31  
     2010     2011     2012  

GSN remeasurement gain*1

            (26,991       

Sony Ericsson remeasurement gain*1

                   (102,331

(Gain) loss on sale of interests in subsidiaries and affiliates, net*1,2

     (30,529     (4,465     (2,882

(Gain) loss on sale, disposal or impairment of assets, net*2,3

     73,517        18,006        45,619   
  

 

 

   

 

 

   

 

 

 
     42,988        (13,450     (59,594
  

 

 

   

 

 

   

 

 

 

 

*1 Refer to Note 24.

 

*2 Refer to Note 25.

 

*3 Refer to Notes 13, 18 and 19.

 

(2) Research and development costs:

Research and development costs charged to cost of sales for the fiscal years ended March 31, 2010, 2011 and 2012 were 432,001 million yen, 426,814 million yen and 433,477 million yen, respectively.

 

(3) Advertising costs:

Advertising costs included in selling, general and administrative expenses for the fiscal years ended March 31, 2010, 2011 and 2012 were 383,540 million yen, 396,425 million yen and 357,106 million yen, respectively.

 

(4) Shipping and handling costs:

Shipping and handling costs for finished goods included in selling, general and administrative expenses for the fiscal years ended March 31, 2010, 2011 and 2012 were 83,622 million yen, 91,926 million yen and 76,644 million yen, respectively, which included the internal transportation costs of finished goods.

 

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21. Income taxes

Domestic and foreign components of income (loss) before income taxes and the provision for current and deferred income taxes attributable to such income are summarized as follows:

 

     Yen in millions  
     Fiscal year ended March 31  
     2010     2011     2012  

Income (loss) before income taxes:

      

Sony Corporation and all subsidiaries in Japan

     45,290        143,917        (106,496

Foreign subsidiaries

     (18,378     61,096        23,310   
  

 

 

   

 

 

   

 

 

 
     26,912        205,013        (83,186
  

 

 

   

 

 

   

 

 

 

Income taxes — Current:

      

Sony Corporation and all subsidiaries in Japan

     42,723        60,514        33,921   

Foreign subsidiaries

     36,397        57,404        74,624   
  

 

 

   

 

 

   

 

 

 
     79,120        117,918        108,545   
  

 

 

   

 

 

   

 

 

 

Income taxes — Deferred:

      

Sony Corporation and all subsidiaries in Japan

     (25,589     365,665        2,794   

Foreign subsidiaries

     (39,573     (58,244     203,900   
  

 

 

   

 

 

   

 

 

 
     (65,162     307,421        206,694   
  

 

 

   

 

 

   

 

 

 

Total income tax expense

     13,958        425,339        315,239   
  

 

 

   

 

 

   

 

 

 

As discussed in Note 2, current income taxes and deferred income taxes in foreign subsidiaries for the fiscal year ended March 31, 2010 have been revised, with an increase in current income taxes by 30,422 million yen and a corresponding decrease to deferred income taxes. This revision had no impact on total income tax expense.

A reconciliation of the differences between the Japanese statutory tax rate and the effective tax rate is as follows:

 

     Fiscal year ended March 31  
     2010     2011     2012  

Statutory tax rate

     41.0     41.0     (41.0 )% 

Non-deductible expenses

     10.3        1.3        4.2   

Income tax credits

     (18.0     (2.0     (3.6

Change in statutory tax rate

     (4.6     0.9        (36.2

Change in valuation allowances

     4.7        174.5        491.0   

Change in deferred tax liabilities on undistributed earnings of foreign subsidiaries and corporate joint ventures

     5.8        1.5        (21.2

Lower tax rate applied to life and non-life insurance business in Japan

     (30.3     (2.8     (7.8

Foreign income tax differential

     (17.6     (10.5     6.7   

Adjustments to tax accruals and reserves

     16.2        4.5        (15.9

Effect of equity in net income (loss) of affiliated companies

     46.0        (2.8     60.0   

Sony Ericsson remeasurement gain

                   (50.6

Insurance recovery tax exemptions related to the Floods

                   (5.2

Other

     (1.6     1.9        (1.4
  

 

 

   

 

 

   

 

 

 

Effective income tax rate

     51.9     207.5     379.0
  

 

 

   

 

 

   

 

 

 

 

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In November 2011, the Japanese legislature enacted tax law changes which included lowering the national tax rate, limiting the annual use of net operating loss carryforwards to 80% of taxable income and increasing the net operating loss carryforward period from seven to nine years for losses incurred in the tax years ending on or after April 1, 2008. As a result, the statutory tax rate during the fiscal years ending March 31, 2013 to March 31, 2015 will be approximately 38% and from the fiscal year ending March 31, 2016 will be approximately 36%. The limitation on the use of net operating loss carryforwards, however, may result in cash tax payments being due if there is taxable income in Japan even though Sony Corporation and its national tax filing group in Japan have significant net operating loss carryforwards available. These tax law changes take effect for Sony from April 1, 2012. Because accounting for income taxes requires the measurement of deferred tax assets and liabilities using the enacted tax rates, the tax law changes resulted in a net deferred tax expense of 32,729 million yen.

The significant components of deferred tax assets and liabilities are as follows:

 

     Yen in millions  
     March 31  
     2011     2012  

Deferred tax assets:

    

Operating loss carryforwards for tax purposes

     387,982        533,912   

Accrued pension and severance costs

     103,674        87,871   

Film costs

     16,405        40,566   

Warranty reserves and accrued expenses

     94,065        82,842   

Future insurance policy benefits

     26,177        22,907   

Inventory

     35,989        37,431   

Depreciation

     35,128        39,473   

Tax credit carryforwards

     74,284        73,945   

Reserve for doubtful accounts

     8,404        5,580   

Impairment of investments

     33,743        34,387   

Deferred revenue in the Pictures segment

     19,254        21,980   

Other

     140,745        146,777   
  

 

 

   

 

 

 

Gross deferred tax assets

     975,850        1,127,671   

Less: Valuation allowance

     (473,713     (868,233
  

 

 

   

 

 

 

Total deferred tax assets

     502,137        259,438   
  

 

 

   

 

 

 

Deferred tax liabilities:

    

Insurance acquisition costs

     (155,073     (140,190

Future insurance policy benefits

     (62,933     (66,998

Unbilled accounts receivable in the Pictures segment

     (40,469     (45,467

Unrealized gains on securities

     (33,101     (43,831

Intangible assets acquired through stock exchange offerings

     (32,136     (28,139

Undistributed earnings of foreign subsidiaries and corporate joint ventures

     (46,261     (27,920

Other

     (46,970     (73,399
  

 

 

   

 

 

 

Gross deferred tax liabilities

     (416,943     (425,944
  

 

 

   

 

 

 

Net deferred tax assets (liabilities)

     85,194        (166,506
  

 

 

   

 

 

 

 

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As discussed in Note 2, the presentation of deferred income taxes in other assets as of March 31, 2011 in the consolidated balance sheets have been revised to conform with the presentation as of March 31, 2012 to reflect the results of an analysis of deferred tax assets in relation to certain unrecognized tax benefits that was completed during the fiscal year ended March 31, 2012. This revision increased total deferred tax assets by 61,115 million yen, which is composed of an increase of gross deferred tax assets and valuation allowance by 71,126 million yen and 10,011 million yen, respectively, as of March 31, 2011.

The significant increase in the deferred tax asset for film costs is as a result of a change in the method of amortization for film costs for tax return purposes. For book purposes, film costs are amortized on an individual-film-forecast method based on the ratio of current period actual revenues to the estimated remaining total revenues. For tax purposes, there is a film by film election to amortize film costs on either the income forecast method or the straight line method. Sony elected straight line for all films released in the fiscal year ended March 31, 2012.

The valuation allowance mainly relates to deferred tax assets of certain consolidated subsidiaries with operating loss carryforwards and tax credit carryforwards for tax purposes that are not more-likely-than-not to be realized. The net changes in the total valuation allowance were increases of 5,741 million yen, 347,460 million yen and 394,520 million yen for the fiscal years ended March 31, 2010, 2011 and 2012, respectively.

The increase during the fiscal year ended March 31, 2011 was primarily due to the additional valuation allowance recorded on deferred tax assets at Sony Corporation and its national tax filing group in Japan. Sony Corporation and its national tax filing group in Japan were in a three year cumulative loss position in the fiscal year ended March 31, 2011. In Japan, Sony Corporation files a standalone tax filing for local tax purposes and a consolidated national tax filing with its wholly-owned Japanese subsidiaries for national tax purposes. As the national tax filing group only includes wholly-owned subsidiaries, certain Japanese subsidiaries are excluded, the most significant of which are Sony Financial Holdings Inc. and its subsidiaries. Due to the cumulative losses in recent years, and because the net operating losses in Japan have a relatively short carryforward period of seven to nine years, a limited number of years remain in the carryforward period. The first year of expiration of the remaining net operating losses in Japan would be 2014 for local taxes and 2016 for national taxes. Carrying amounts of deferred tax assets require a reduction by a valuation allowance if, based on the available positive and negative evidence, it is more likely than not that such assets will not be realized. While the cumulative loss position and the remaining limited years in the carryforward period were significant negative evidence, there was positive evidence in the form of a history of taxable income and a history of utilizing assets before expiration, as well as the availability of tax strategies regarding the utilization of the deferred tax assets. However, based on the near term forecast at the end of the fiscal year ended March 31, 2011, including the anticipated impact of the Great East Japan Earthquake and the lesser weight provided to longer range forecasts when an entity is in a cumulative loss, Sony did not believe that the objectively verifiable positive evidence was sufficient to overcome the significant negative evidence of the cumulative loss. As the weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objectively verifiable negative evidence of recent financial reporting losses. Accordingly, Sony, based on the weight of the available positive and negative evidence, established a valuation allowance of 362,316 million yen as of March 31, 2011.

The increase during the fiscal year ended March 31, 2012 was primarily due to the additional valuation allowances recorded on deferred tax assets in the U.S. and the U.K. and additional valuation allowances recorded in Japan for Sony Corporation and certain Japanese subsidiaries. As of March 31, 2012, Sony has concluded that with respect to Sony Americas Holding Inc. (“SAHI”) and its consolidated tax filing group in the U.S., and Sony Europe Limited (“SEU”), a subsidiary in the U.K., the cumulative loss position was significant negative evidence that was difficult to overcome. There was positive evidence in the form of tax planning actions and strategies, the long carryforward periods for utilization, as well as a history of taxable income and utilization of assets before expiration. The tax planning strategies included changes in film amortization methods in the U.S. as described

 

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above, the success of which depends on future forecasts of income. Notwithstanding this positive evidence, the weight given to evidence is commensurate with the extent to which it can be objectively verified. It is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objectively verifiable negative evidence of recent financial reporting losses. Accordingly, Sony, based on the weight of the available positive and negative evidence, established a valuation allowance of 203,025 million yen for SAHI and its consolidated tax filing group in the U.S., and 20,694 million yen for SEU, as of March 31, 2012. Sony Corporation and its national tax filing group in Japan remain in a cumulative loss position as of March 31, 2012, as a result, during the fiscal year ended March 31, 2012, Sony recorded an additional valuation allowance against certain deferred tax assets at Sony Corporation and its national tax filing group in Japan. In addition, several Japanese subsidiaries are also in a cumulative loss position as of March 31, 2012 and, therefore, recorded valuation allowances of 32,631 million yen against their separate deferred tax assets for local tax purposes.

Prior to its acquisition, Sony Ericsson, principally due to its cumulative loss position, had a valuation allowance against deferred tax assets mainly in Sweden in the amount of 78,393 million yen, for which Sony reported the impact of the valuation allowance through its 50% equity interest in Sony Ericsson.

Net deferred tax assets (net of valuation allowance) are included in the consolidated balance sheets as follows:

 

     Yen in millions  
     March 31  
     2011     2012  

Current assets — Deferred income taxes

     133,059        36,769   

Other assets — Deferred income taxes

     300,702        100,460   

Current liabilities — Other

     (42,340     (19,236

Long-term liabilities — Deferred income taxes

     (306,227     (284,499
  

 

 

   

 

 

 

Net deferred tax assets (liabilities)

     85,194        (166,506
  

 

 

   

 

 

 

As discussed in Note 2, deferred income taxes in other assets and net deferred tax assets as of March 31, 2011 have been revised, resulting in an increase of 61,115 million yen.

At March 31, 2012, deferred income taxes have not been provided on undistributed earnings of foreign subsidiaries and corporate joint ventures not expected to be remitted in the foreseeable future totaling 1,043,693 million yen, and on the gain of 61,544 million yen on a subsidiary’s sale of stock arising from the issuance of common stock of Sony Music Entertainment (Japan) Inc. (“SMEJ”) in a public offering to third parties in November 1991, as Sony does not anticipate any significant tax consequences on possible future disposition of its investment based on its tax planning strategies. The unrecognized deferred tax liabilities as of March 31, 2012 for such temporary differences cannot be determined.

At March 31, 2012, Sony has operating loss carryforwards for tax purposes, the tax effect of which totaled 533,912 million yen, which will be available as an offset against future taxable income on tax returns to be filed in various tax jurisdictions. With the exception of 125,537 million yen with no expiration period, substantially all of the total operating loss carryforwards expire at various periods between the fiscal years ending March 31, 2013 and 2021 and the remaining amounts expire in periods up to 20 years depending on the jurisdiction.

Tax credit carryforwards for tax purposes at March 31, 2012 amounted to 73,945 million yen. With the exception of 14,021 million yen with no expiration period, total available tax credit carryforwards expire at various dates primarily up to 10 years.

 

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A reconciliation of the beginning and ending gross amounts of unrecognized tax benefits is as follows:

 

     Yen in millions  
     March 31  
     2010     2011     2012  

Balance at beginning of the fiscal year

     276,627        229,228        225,120   

Reductions for tax positions of prior years

     (38,450     (39,005     (25,302

Additions for tax positions of prior years

     4,816        19,947        59,159   

Additions based on tax positions related to the current year

     10,873        41,201        44,307   

Settlements

     (5,921     (1,478     (4,046

Lapse in statute of limitations

     (1,506     (7,770     (3,807

Foreign currency translation adjustments

     (17,211     (17,003     (7,120
  

 

 

   

 

 

   

 

 

 

Balance at end of the fiscal year

     229,228        225,120        288,311   
  

 

 

   

 

 

   

 

 

 

Total net amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate

     76,125        87,497        77,925   

The major changes in the total gross amount of unrecognized tax benefit balances relate to the Bilateral Advance Pricing Agreements (“APAs”) filed for certain subsidiaries in the Consumer Products & Services, Professional, Device & Solutions and All Other segments with respect to their intercompany cross-border transactions. These APAs include agreements between Sony and two taxing authorities under the authority of the mutual agreement procedure specified in income tax treaties. Sony reviews its estimated tax expense based on the progress made in these procedures and makes adjustments to its estimates as necessary. Because these are government to government negotiations, it is possible that the final outcomes of the agreements may differ from Sony’s current assessment of the more-likely-than-not outcomes of such agreements.

During the fiscal year ended March 31, 2010, Sony recorded 4,707 million yen of interest expense and 1,565 million yen of penalties.

During the fiscal year ended March 31, 2011, Sony recorded 3,612 million yen of interest expense and reversed 261 million yen of penalties. At March 31, 2011, Sony had recorded liabilities of 14,523 million yen and 4,407 million yen for the payments of interest and penalties, respectively.

During the fiscal year ended March 31, 2012, Sony reversed 1,336 million yen of interest expense and 333 million yen of penalties. At March 31, 2012, Sony had recorded liabilities of 13,187 million yen and 4,074 million yen for the payments of interest and penalties, respectively.

Sony operates in multiple jurisdictions throughout the world, and its tax returns are periodically audited by Japanese and foreign taxing authorities. As a result of audit settlements, the conclusion of current examinations, the expiration of the statute of limitations in several jurisdictions and other reevaluations of Sony’s tax positions, it is expected that the amount of unrecognized tax benefits will change in the next twelve months. Accordingly, Sony believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to 122,227 million yen within the next twelve months.

Sony remains subject to examinations by Japanese taxing authorities for tax years from 2005 through 2011, and by the U.S. and other foreign taxing authorities for tax years from 1998 through 2011.

 

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22. Reconciliation of the differences between basic and diluted EPS

Reconciliation of the differences between basic and diluted EPS for the fiscal years ended March 31, 2010, 2011 and 2012 is as follows:

 

     Yen in millions  
     Fiscal year ended March 31  
     2010     2011     2012  

Net loss attributable to Sony Corporation’s stockholders for basic and diluted EPS computation

     (40,802     (259,585     (456,660
  

 

 

   

 

 

   

 

 

 
     Thousands of shares  

Weighted-average shares outstanding

     1,003,520        1,003,559        1,003,578   

Effect of dilutive securities:

      

Stock acquisition rights

                     

Convertible bonds

                     
  

 

 

   

 

 

   

 

 

 

Weighted-average shares for diluted EPS computation

     1,003,520        1,003,559        1,003,578   
  

 

 

   

 

 

   

 

 

 
     Yen  

Basic EPS

     (40.66     (258.66     (455.03
  

 

 

   

 

 

   

 

 

 

Diluted EPS

     (40.66     (258.66     (455.03
  

 

 

   

 

 

   

 

 

 

Potential shares of common stock upon the exercise of stock acquisition rights and convertible bonds, which were excluded from the computation of diluted EPS for the fiscal years ended March 31, 2010, 2011 and 2012 were 17,600 thousand shares, 19,383 thousand shares and 22,417 thousand shares, respectively. All potential shares were excluded as anti-dilutive for those fiscal years ended March 31, 2010, 2011 and 2012 due to Sony incurring a net loss attributable to Sony Corporation’s stockholders for those fiscal years.

 

23. Variable interest entities

Sony has, from time to time, entered into various arrangements with VIEs. These arrangements include facilities which provide for the leasing of certain property, several joint ventures in the recorded music business, the U.S. based music publishing business, the financing of film production and the outsourcing of manufacturing operations. In addition, Sony has entered into several accounts receivable sales programs that involve VIEs, which are described in Note 6. For the VIEs that are described below, it has been determined that Sony is the primary beneficiary and, accordingly, these VIEs are consolidated by Sony.

Sony leases the headquarters building of its U.S. subsidiary from a VIE. At the end of the lease term which expires in December 2015, Sony has agreed to either renew the lease, purchase the building or remarket it to a third-party on behalf of the owner. Under the lease, Sony has provided a minimum guarantee to the VIE that if the sales price is less than 255 million U.S. dollars, Sony is obligated to make up the lesser of the shortfall or 214 million U.S. dollars. Based on a qualitative assessment, it was determined that Sony has the power to direct the activities that most significantly impact the VIE’s economic performance, as well as the obligation to absorb the losses of the VIE due to the minimum guarantee. As a result, it has been determined that Sony is the primary beneficiary. Sony has not provided any additional support to the VIE other than its contractually obligated lease payments. Sony has the option to purchase the building at any time during the lease term for 255 million U.S. dollars. The debt held by the VIE is unsecured and there is no recourse to the creditors outside of Sony. The assets of the VIE are not available to settle the obligations of Sony. At March 31, 2012, the VIE had property, plant and equipment of 14,332 million yen and long-term debt of 20,991 million yen which were included in Sony’s consolidated balance sheets.

 

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Sony’s U.S. subsidiary that is engaged in the recorded music business has entered into several joint ventures with companies involved in the production and creation of recorded music. Sony has reviewed these joint ventures and determined that they are VIEs. Based on a qualitative assessment, it was determined that Sony has the power to direct the activities that most significantly impact the VIEs’ economic performance, as well as the obligation to absorb the losses of theses VIEs as Sony is responsible for providing funding to these VIEs, and in most cases absorbs all losses until the VIEs become profitable. As a result, it has been determined that Sony is the primary beneficiary. The assets of these VIEs are not available to settle the obligations of Sony. On an aggregate basis, the total assets and liabilities for these VIEs at March 31, 2012 were 17,552 million yen and 7,918 million yen, respectively.

Sony’s U.S. based music publishing subsidiary is a joint venture with a third-party investor and has been determined to be a VIE. The subsidiary owns and acquires rights to musical compositions, exploits and markets these compositions and receives royalties or fees for their use. Under the terms of the joint venture, Sony has the obligation to fund any working capital deficits as well as any acquisition of music publishing rights made by the joint venture. In addition, the third-party investor receives a guaranteed annual dividend of up to 17.5 million U.S. dollars through December 31, 2013. Based on a qualitative assessment, it was determined that Sony has the power to direct the activities that most significantly impact the VIE’s economic performance, as well as the obligation to absorb the losses of the VIE due to its obligation to provide funding to the joint venture. As a result, it has been determined that Sony is the primary beneficiary. The assets of the music publishing subsidiary are not available to settle the obligations of Sony. At March 31, 2012, the assets and liabilities of the VIE that were included in Sony’s consolidated balance sheets were as follows:

 

     Yen in millions  

Assets:

  

Cash and cash equivalents

     5,239   

Account receivables, net

     248   

Other current assets

     20,523   

Property, plant and equipment, net

     863   

Intangibles, net

     54,566   

Goodwill

     12,483   

Other noncurrent assets

     6,708   
  

 

 

 

Total assets

     100,630   
  

 

 

 

Liabilities:

  

Accounts payable and accrued expenses

     32,835   

Other current liabilities

     5,222   

Other noncurrent liabilities

     1,254   
  

 

 

 

Total liabilities

     39,311   
  

 

 

 

VIEs in which Sony holds a significant variable interest, but is not the primary beneficiary are described as follows:

In connection with the September 2010 refinancing of the debt obligations of the third-party investor in the music publishing subsidiary described above, Sony has issued a guarantee to a creditor of the third-party investor in which Sony has agreed to repay the outstanding principal plus accrued interest up to a maximum of 303 million U.S. dollars to the creditor should the third-party investor default on its obligation. The obligation of the third-party investor is collateralized by its 50% interest in Sony’s music publishing subsidiary. Should Sony have to make a payment under the terms of the guarantee, Sony would assume the creditor’s rights to the underlying collateral. The assets of the third-party investor that are being used as collateral were placed in a separate trust which is also a VIE in which Sony has significant variable interests. Based on a qualitative assessment, it was determined that Sony is not the primary beneficiary as Sony does not have the power to direct

 

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the activities of the trust. The assets held by the trust consist solely of the third-party investor’s 50% ownership interest in the music publishing subsidiary. At March 31, 2012, the fair value of the assets held by the trust exceeded 303 million U.S. dollars.

Sony’s subsidiary in the Pictures segment entered into a joint venture agreement with a VIE to acquire the international distribution rights, as defined, to 12 pictures. The subsidiary is required to distribute these pictures internationally, for contractually defined fees determined as percentages of gross receipts and is responsible for all distribution and marketing expenses, which are recouped from such distribution fees, each as defined. The VIE was capitalized with total financing of 406 million U.S. dollars. Of this amount, 11 million U.S. dollars was contributed by the subsidiary, 95 million U.S. dollars was provided by unrelated third-party investors and the remaining funding was provided through a 300 million U.S. dollar bank credit facility. Under the agreement, the subsidiary’s 11 million U.S. dollars equity investment is the last equity to be repaid. Based on the factors above, it was previously determined that the subsidiary was the primary beneficiary as it had the power to direct the activities of the VIE and was projected to absorb a significant amount of the losses or residual returns of the VIE. As of March 31, 2009, the bank credit facility had been terminated and the third-party investors have been repaid their 95 million U.S. dollar investment. On May 11, 2009, the subsidiary repurchased from the VIE the international distribution rights to the 12 pictures and the VIE received a participation interest in these films on identical financial terms to those described above. As a result of repurchasing the international distribution rights from the VIE, Sony determined that the subsidiary was no longer the primary beneficiary as it no longer had the power to direct the activities of the VIE and was not projected to absorb a significant amount of the losses or residual returns of the VIE. No gain or loss was recognized by the subsidiary on the deconsolidation of the VIE. As of March 31, 2012, the subsidiary’s balance sheet includes no film costs related to the international distribution rights acquired from the VIE and 748 million yen of participation liabilities recorded within accounts payable, other and accrued expenses as well as other noncurrent liabilities due to the VIE. On April 11, 2012, the subsidiary acquired the VIE’s participation interest for 22 million U.S. dollars. As a result of this acquisition, the VIE no longer has any financial interest in these pictures.

Sony’s subsidiary in the Pictures segment entered into two separate production/co-financing agreements with VIEs to co-finance 19 films that were released over the 31 months ended July 31, 2008. The subsidiary received 565 million U.S. dollars over the term of the agreements to fund the production or acquisition cost of films (including fees and expenses). Under these agreements, the subsidiary is responsible for the marketing and distribution of the product through its global distribution channels. The VIEs share in the net profits, as defined, of the films after the subsidiary recoups a distribution fee, its marketing and distribution expenses, and third-party participation and residual costs, each as defined. As the subsidiary did not have the power to direct the activities of these VIEs, the subsidiary is not the primary beneficiary of either of the VIEs. At March 31, 2012, there were no amounts recorded on the subsidiary’s balance sheet that related to either of the VIEs other than the investors’ earned but unpaid share of the films’ net profits, as defined.

Additionally, on January 19, 2007, the subsidiary entered into a third production/co-financing agreement with another VIE to co-finance a majority of the films submitted through March 2012. The subsidiary received a commitment from the VIE that it would fund up to 525 million U.S. dollars on a revolving basis to fund the production or acquisition cost of films (including fees and expenses). Under the agreement, the subsidiary is responsible for the marketing and distribution of the product through its global distribution channels. The VIE shares in the net profits, as defined, of the films after the subsidiary recoups a distribution fee, its marketing and distribution expenses, and third-party participation and residual costs, each as defined. As the subsidiary did not have the power to direct the activities of the VIE, the subsidiary is not the primary beneficiary of the VIE. On December 16, 2011, the subsidiary and the VIE agreed to modify the production/co-financing agreement (the “Modification”). Per the Modification, the VIE paid the subsidiary 20 million U.S. dollars and transferred selected rights in the films financed prior to the Modification (the “Previously Financed Films”) to the subsidiary, including the VIE’s share in the net profits in the Previously Financed Films. In exchange, the subsidiary released the VIE from its obligation to finance future films and the VIE received a participation interest in the Previously Financed Films. As the subsidiary, after the Modification, continues to not have the

 

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power to direct the activities of the VIE, the subsidiary is not the primary beneficiary of the VIE. At March 31, 2012, there were no amounts recorded on the subsidiary’s balance sheet that related to the VIE other than the VIE’s participation interest in the Previously Financed Films.

In January 2010, Sony sold 90.0% of its interest in a Mexican subsidiary which primarily manufactured LCD televisions, as well as other assets including machinery and equipment of 4,520 million yen and inventories of 5,619 million yen, to a contract manufacturer. The continuing entity, which would perform this manufacturing going forward, is a VIE as it is thinly capitalized and dependent on funding from the parent entity. Based on a qualitative assessment, it was determined that Sony is not the primary beneficiary as Sony does not have the power to direct the activities that most significantly impact the VIE’s economic performance nor does Sony have the obligation to absorb the losses of the VIE. In connection with the sale of Sony’s controlling interest in the subsidiary, Sony received 11,189 million yen and recorded a loss of 1,664 million yen during the fiscal year ended March 31, 2010. Concurrent with the sale, Sony entered into an agreement with the VIE and its parent company in which Sony agreed to purchase a significant share of the LCD televisions that Sony sells in certain markets, including the U.S. market. As of March 31, 2012, the amounts recorded on Sony’s consolidated balance sheets that relate to the VIE include receivables recorded within prepaid expenses and other current assets of 10,295 million yen and accounts payable, trade of 18,830 million yen. Sony’s maximum exposure to losses is considered insignificant.

As described in Note 6, accounts receivable sales programs in Japan and in the Financial Services segment also involve VIEs that formerly met the criteria to be a QSPE. These VIEs are all special purpose entities of the sponsor banks. In addition, a counterparty of the accounts receivable transactions in the U.S. includes a VIE. Based on a qualitative assessment, Sony is not the primary beneficiary and therefore does not consolidate these entities as Sony does not have the power to direct the activities, an obligation to absorb losses, or the right to receive the residual returns of these VIEs. Sony’s maximum exposure to losses from these VIEs is considered insignificant.

As described in Note 25, in connection with the sale of the small- and medium-sized TFT LCD business, Sony will transfer to a third-party legal ownership of a certain subsidiary within the former small- and medium-sized TFT LCD business during the fiscal year ending March 31, 2013. As of March 31, 2012, this entity is a VIE. Based on a qualitative assessment, Sony is not the primary beneficiary and therefore does not consolidate the entity after the sale as Sony does not have the power to direct the activities of the VIE nor does Sony have an obligation to absorb the losses or the right to receive the residual returns of this VIE. Sony’s maximum exposure to losses is considered insignificant.

 

24. Acquisitions

 

(1) Game Show Network acquisition

In April 2009, Sony sold a portion of its 50% ownership interest in GSN, which operates a U.S. cable network and online business, to the other investor in GSN, which resulted in cash proceeds of 8,831 million yen and a gain of 8,322 million yen for the fiscal year ended March 31, 2010. The gain was recorded in other operating (income) expense, net.

In March 2011, Sony acquired an additional 5% equity interest in GSN from the successor in interest to the other investor (the “Current Investor”) for 4,849 million yen, resulting in Sony owning a 40% equity interest in GSN. As part of the acquisition, Sony obtained a controlling interest in GSN, including the ability to appoint the majority of representatives on the GSN management committee, control over approval of the budget for GSN and control over the hiring, terminating, and setting compensation of the senior management of GSN. This acquisition will strengthen Sony’s presence in U.S. cable networks and Sony expects that it will allow GSN to further exploit and benefit from the light entertainment assets in the Pictures segment.

In addition to acquiring the additional 5% equity interest in GSN, Sony granted a put right to the Current Investor and received a call right from the Current Investor for an additional 18% equity interest in GSN. The put

 

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right is exercisable during three windows starting on April 1 of 2012, 2013 and 2014 and lasting for 60 business days (each such period, a “Trigger Window”). In the event that GSN’s audited financial statements for the most recent completed calendar year are not available on April 1, the Trigger Window shall commence on the day when GSN’s audited financial statements are delivered to the Current Investor. As of May 31, 2012, GSN’s audited financial statements for the year ended December 31, 2011 have not been delivered to the Current Investor. The exercise price of the put is calculated using a formula based on an agreed upon multiple of the earnings of GSN with a minimum price of 234 million U.S. dollars and a maximum price of 288 million U.S. dollars. Sony’s call right is exercisable only if the put is not exercised, and may be exercised for 60 business days immediately after the last put window has expired. The exercise price of the call is calculated using the same formula as the put with a minimum price of 234 million U.S. dollars. A buy/sell provision also applies to the equity interests in GSN owned by Sony and the Current Investor and may be exercised annually for a 60 business day window beginning April 1, 2015.

Prior to the March 2011 acquisition, Sony’s interest in GSN was accounted for under the equity method of accounting. As a result of Sony obtaining a controlling interest in GSN, Sony consolidated GSN using the acquisition method of accounting and recorded the fair value of the identifiable assets, liabilities assumed, redeemable noncontrolling interest, noncontrolling interest and residual goodwill of GSN. In accordance with the accounting guidance for business combinations achieved in stages, Sony remeasured the 35% equity interest in GSN that it owned prior to the acquisition at a fair value of 33,940 million yen which resulted in the recognition of a gain of 26,991 million yen recorded in other operating (income) expense, net.

 

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The following table summarizes the preliminary and final fair values assigned to the assets and liabilities of GSN that were recorded in the Pictures segment. Due to the fact that the acquisition closed in March 2011, certain areas of the purchase price allocation were not yet finalized as of the fiscal year ended March 31, 2011, including the fair value of certain tangible assets and liabilities acquired, the valuation of intangible assets acquired, income taxes and residual goodwill. The measurement period adjustments did not have a significant impact on Sony’s results of operations and financial position and, therefore, Sony has not retrospectively adjusted the consolidated financial statements.

 

     Yen in millions  
     Acquired
assets and
liabilities
recorded at fair
value as of
acquisition
date

(Preliminary)
     Measurement
period
Adjustments
    Acquired
assets and
liabilities
recorded at fair
value as of
acquisition
date

(Final)
 

Cash and cash equivalents

     4,039           4,039   

Notes and accounts receivable, trade

     3,089           3,089   

Prepaid expenses and other current assets

     395           395   

Film costs

     4,178           4,178   

Property, plant and equipment

     220           220   

Intangibles

     46,749         574        47,323   

Goodwill

     46,432         (527     45,905   

Other noncurrent assets

     38           38   
  

 

 

    

 

 

   

 

 

 

Total assets

     105,140         47        105,187   

Notes and accounts payable, trade

     970           970   

Accounts payable, other and accrued expenses

     4,131           4,131   

Other current liabilities

     59           59   

Other noncurrent liabilities

     1,683         47        1,730   
  

 

 

    

 

 

   

 

 

 

Total liabilities

     6,843         47        6,890   

Redeemable noncontrolling interest

     18,779           18,779   

Noncontrolling interest

     40,728           40,728   
  

 

 

      

 

 

 

Total

     38,790           38,790   
  

 

 

      

 

 

 

The portion of the noncontrolling interest that can be put to Sony is accounted for as redeemable securities because redemption is outside of Sony’s control. As such, the redeemable noncontrolling interest is reported in the mezzanine equity section in the consolidated balance sheets. The fair value of the noncontrolling interest was calculated using a combination of a discounted cash flow model and market comparables of similar transactions and companies. A lack of control discount was not applied in determining the fair value of the noncontrolling interest as the cash flows attributable to the noncontrolling interest holder are expected to be proportional to the cash flows attributable to the controlling interest holder.

No value was allocated to in-process research and development in this acquisition. Goodwill represents unidentifiable intangible assets, such as future growth from new revenue streams and synergies with Sony’s existing assets and businesses, and is calculated as the excess of the purchase price over the estimated fair value of the net tangible and intangible assets acquired and is not deductible for tax purposes. The goodwill recorded in connection with this acquisition is included in the Pictures segment.

 

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The intangible assets are comprised of the following:

 

     Yen in millions      Years  
     Acquired
intangibles
recorded at fair
value
     Weighted-average
amortization period
 

Intangibles subject to amortization

     

Television carriage agreements (broadcasting agreements)

     33,698         20   

Other

     4,736         3   

Intangible having an indefinite life

     

Trademarks

     8,889           
  

 

 

    

Total intangibles

     47,323      
  

 

 

    

The results of operations of GSN are included in the Pictures segment after the acquisition date. The following unaudited supplemental pro forma financial information presents the combined results of operations of Sony and GSN as though the acquisition had occurred as of the beginning of the fiscal years ended March 31, 2010 and 2011:

 

     Yen in millions,
except per share data
 
     Fiscal year ended March 31  
         2010             2011      
     (Unaudited)  

Net sales

     6,313,222        6,325,310   

Operating income

     60,685        199,445   

Net loss attributable to Sony Corporation’s stockholders

     (33,655     (259,731

Basic EPS

     (33.54     (258.81

Diluted EPS

     (33.54     (258.81

The unaudited supplemental pro forma financial information is based on estimates and assumptions, which Sony believes are reasonable and is not intended to represent or be indicative of what Sony’s consolidated net loss attributable to Sony Corporation’s stockholders would have been had the acquisition been completed at the beginning of each of these periods and should not be taken as indicative of Sony’s future consolidated net loss attributable to Sony Corporation’s stockholders. The unaudited supplemental pro forma financial information includes a gain from remeasurement of the previously owned equity interest and incremental intangible asset amortization, net of the related tax effects.

 

(2) Sony Ericsson acquisition

On February 15, 2012, Sony acquired Ericsson’s 50% equity interest in Sony Ericsson, resulting in Sony Ericsson becoming a wholly-owned subsidiary of Sony. The transaction also provided Sony with a broad intellectual property cross-licensing (“IP cross-licensing”) agreement and ownership of five essential patent families relating to wireless handset technology. The total consideration consisted of 107,174 million yen (1,050 million euros) of cash. The agreement with Ericsson also provided for contingent consideration depending on the level of certain specified costs. Based on the estimated level of the specified costs, no amounts were expected to be paid under this arrangement and therefore no amounts were recorded as additional consideration. This acquisition will integrate Sony Ericsson, renamed Sony Mobile, into Sony’s platform of network-connected consumer electronics products with the aim of accelerating convergence.

Prior to the acquisition, Sony’s interest in Sony Ericsson was accounted for under the equity method of accounting. As a result of Sony obtaining a controlling interest in Sony Ericsson, Sony consolidated Sony Ericsson using the acquisition method of accounting and recorded the fair value of the identifiable assets, liabilities assumed, noncontrolling interest and residual goodwill of Sony Ericsson. In accordance with the

 

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accounting guidance for business combinations achieved in stages, Sony remeasured the 50% equity interest in Sony Ericsson that it owned prior to the acquisition at a fair value of 71,449 million yen which resulted in the recognition of a gain of 102,331 million yen recorded in other operating (income) expense, net. Sony elected not to record a deferred tax liability corresponding to the difference between the financial reporting basis which was remeasured to fair value upon an acquisition of a controlling interest in a foreign entity and the tax basis in the previously held ownership interest. In addition, accumulated translation adjustments of 11,690 million yen remained as a component of accumulated other comprehensive income.

The following table summarizes the fair values assigned to the assets and liabilities of Sony Ericsson that were recorded in the Sony Mobile segment and the IP cross-licensing that was assigned to Corporate for segment reporting purposes.

 

     Yen  in
millions
 
     Acquired
assets and
liabilities
recorded at

fair value
as of the
acquisition
date
 

Cash and cash equivalents

     35,331   

Notes and accounts receivable, trade

     54,522   

Inventories

     54,095   

Prepaid expenses and other current assets

     28,618   

Property, plant and equipment

     18,075   

Intangibles

     123,097   

Goodwill

     128,522   

Other noncurrent assets

     22,463   
  

 

 

 

Total assets

     464,723   

Notes and accounts payable, trade

     66,522   

Accounts payable, other and accrued expenses

     61,467   

Other current liabilities

     136,938   

Other noncurrent liabilities

     7,126   
  

 

 

 

Total liabilities

     272,053   

Noncontrolling interest

     14,047   
  

 

 

 

Total

     178,623   
  

 

 

 

No value was allocated to in-process research and development in this acquisition as no material amounts were identified; however, certain significant research and development activities were substantially completed as of the acquisition date and included within acquired intangible assets as developed technology. Goodwill represents unidentifiable intangible assets, such as future growth from new revenue streams, increased market share particularly in emerging markets and the U.S., synergies with existing Sony assets and businesses and an assembled workforce, and is calculated as the excess of the purchase price over the estimated fair value of the net tangible and intangible assets acquired and is not deductible for tax purposes. The goodwill recorded in connection with this acquisition is included in the Sony Mobile segment.

 

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The intangible assets are comprised of the following:

 

     Yen in millions      Years  
     Acquired
intangibles
recorded  at

fair value
     Weighted-average
amortization period
 

Intangibles subject to amortization

     

IP cross-licensing

     60,834         6   

Developed technology

     24,599         9   

Customer relationships

     19,597         14   

Trademarks

     14,086         7   

Other

     3,981         7   
  

 

 

    

Total intangibles

     123,097      
  

 

 

    

The following unaudited supplemental pro forma financial information presents the combined results of operations of Sony and Sony Ericsson as though the acquisition had occurred as of the beginning of the fiscal year ended March 31, 2011:

 

     Yen in millions,
except per share data
 
     Fiscal year ended March 31  
     2011     2012  
     (Unaudited)  

Net sales

     6,901,151        5,941,131   

Operating income (loss)

     231,895        (187,725

Net loss attributable to Sony Corporation’s stockholders

     (226,038     (654,833

Basic EPS

     (225.24     (652.50

Diluted EPS

     (225.24     (652.50

The unaudited supplemental pro forma financial information is based on estimates and assumptions, which Sony believes are reasonable and is not intended to represent or be indicative of what Sony’s consolidated net loss attributable to Sony Corporation’s stockholders would have been had the acquisition been completed at the beginning of the fiscal year ended March 31, 2011 and should not be taken as indicative of Sony’s future consolidated net loss attributable to Sony Corporation’s stockholders. The unaudited supplemental pro forma financial information includes:

 

   

the elimination of equity in net income (loss) and consolidation of Sony Ericsson;

 

   

the gain from remeasurement of the previously owned equity interest;

 

   

incremental intangible asset amortization, net of the related tax effects;

 

   

certain royalty adjustments; and

 

   

additional debt issuance costs and interest expense, incurred in connection with the acquisition.

 

(3) Sony Semiconductor acquisition

On April 1, 2011, Sony Semiconductor Kyushu Corporation, a wholly-owned subsidiary of Sony Corporation, acquired from Toshiba Corporation (“Toshiba”) for 57,451 million yen semiconductor fabrication equipment and certain related assets. Sony Semiconductor Kyushu Corporation has subsequently changed its name to Sony Semiconductor Corporation, effective November 1, 2011. Sony’s goal in acquiring the assets is to further strengthen its production capacity for CMOS image sensors.

 

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The assets were operated by Nagasaki Semiconductor Manufacturing Corporation (“NSM”), a joint venture among Toshiba, Sony Corporation and Sony Computer Entertainment Inc., a wholly-owned subsidiary of Sony Corporation. Subsequent to the acquisition, Sony entered into a three year sale and leaseback transaction regarding certain of the acquired machinery and equipment with its equity interest affiliate, SFI Leasing Company, Limited, and received proceeds of 50,537 million yen based on the amounts recorded at fair value in the acquisition. These transactions are included within other in the investing activities section of the consolidated statements of cash flows.

In connection with the acquisition, Toshiba and Sony terminated their NSM joint venture relationship. Sony also entered into a supply arrangement to manufacture and supply system LSIs to Toshiba for one year following the acquisition.

The following table summarizes the fair values assigned to the assets acquired at the acquisition date.

 

     Yen in millions  
     Acquired
assets
recorded at
fair value
 

Inventories

     4,370   

Other current assets

     82   

Machinery and equipment

     51,083   

Intangibles

     1,223   

Other noncurrent assets

     693   
  

 

 

 

Total

     57,451   
  

 

 

 

As the purchase price was fully allocated to identifiable tangible and intangible assets and no liabilities were assumed, there was no goodwill recorded as part of the acquisition. The unaudited supplemental pro forma results of operations have not been presented because the effect of the acquisition was not material.

 

(4) Other acquisitions

During the fiscal year ended March 31, 2010, Sony completed acquisitions for total consideration of 17,616 million yen, of which 1,420 million yen was contingent consideration. The remaining consideration was paid primarily in cash. As a result of the acquisitions, Sony recorded 13,425 million yen of goodwill and 3,708 million yen of intangible assets. A portion of the contingent consideration was subsequently reversed into income during the fiscal year ended March 31, 2012 as it was determined that the operating targets that needed to be achieved for the contingent consideration to be paid would not be met. The reversal of the accrued contingent consideration resulted in income of 896 million yen which was recorded in other operating (income) expense, net in the consolidated statements of income for the fiscal year ended March 31, 2012.

During the fiscal year ended March 31, 2011, Sony completed other acquisitions for total consideration of 2,884 million yen which was paid primarily in cash and there was no material contingent consideration subject to future change. As a result of the acquisitions, Sony recorded 1,415 million yen of goodwill and 1,227 million yen of intangible assets.

During the fiscal year ended March 31, 2012, Sony completed other acquisitions for total consideration of 7,914 million yen which was paid primarily in cash and there was no material contingent consideration subject to future change. As a result of the acquisitions, Sony recorded 5,853 million yen of goodwill and 3,345 million yen of intangible assets.

 

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No significant amounts have been allocated to in-process research and development and all of the entities described above have been consolidated into Sony’s results of operations since their respective acquisition dates. Pro forma results of operations have not been presented because the effects of Sony Semiconductor and the other acquisitions, individually and in aggregate, were not material.

 

25. Divestitures

 

(1) HBO Latin America and HBO Central Europe

In March 2010, Sony sold a portion of its investment and certain ancillary rights, which was included in the Pictures segment, in its HBO Latin America venture, which owns and operates certain premium pay television businesses in Latin America, to the venture’s majority shareholder (“Majority Shareholder”). Sony accounted for this sale in accordance with the accounting guidance for transfers and servicing. Prior to this transaction, Sony owned approximately 29% of this venture, which was accounted for under the equity method, and, as a result of this transaction, Sony owned approximately 8% of this venture (the “Retained Interest”), which was accounted for under the cost method.

As consideration for the transaction, Sony received cash proceeds of 19,424 million yen and received a put option valued at 1,371 million yen and the sale resulted in a gain of 18,035 million yen for the fiscal year ended March 31, 2010. In November 2010, Sony notified the Majority Shareholder that Sony intended to exercise the put option. The purchase of the Retained Interest by the Majority Shareholder was completed in March 2011 which resulted in cash proceeds of 5,285 million yen and a gain of 3,329 million yen for the fiscal year ended March 31, 2011.

In January 2010, in a separate transaction, Sony sold its entire investment, which was included in the Pictures segment, in its HBO Central Europe joint venture, which owns and operates a premium pay television business in Central Europe, to an affiliate of the Majority Shareholder. The sale resulted in cash proceeds of 7,660 million yen and a gain of 3,957 million yen for the fiscal year ended March 31, 2010.

The above mentioned transactions and the other transactions which were not material individually and in aggregate were recorded in other operating (income) expense, net due to either the nature of the transaction or in consideration of factors including the relationship to Sony’s core operations.

 

(2) Small- and medium-sized TFT LCD business

In March 2012, Sony sold the small- and medium-sized TFT LCD business, which was included in the Professional, Device & Solutions segment, to Japan Display Inc. The sale proceeds are subject to the finalization of certain post-closing conditions and adjustments. In connection with the sale, Sony will transfer legal ownership of a certain subsidiary within the former small- and medium-sized TFT LCD business to Japan Display Inc. during the fiscal year ended March 31, 2013. As of March 31, 2012, this entity is a VIE, although Sony is not the primary beneficiary and therefore does not consolidate the entity after the sale. Refer to Note 23. During the fiscal year ended March 31, 2012, Sony recorded an impairment loss of 19,187 million yen in other operating (income) expense, net in the consolidated statements of income, as the disposal group was classified as held for sale and recorded at the lesser of carrying value or fair value. Following the sale, Sony purchased an equity interest in Japan Display Inc. which Sony accounts for under the cost method.

 

(3) S-LCD Corporation

In the fiscal year ended March 31, 2012, Sony sold all of its shares of S-LCD, the LCD panel manufacturing joint venture. Refer to Note 5.

 

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(4) Chemical products business

During the fiscal year ended March 31, 2012, Sony entered into a memorandum of understanding with a third-party to sell the chemical products business, which is included in the Professional, Device & Solutions segment. Sony classified certain assets and liabilities related to the business as held for sale as of March 31, 2012, and anticipates completing the divestiture during the fiscal year ending March 31, 2013. No impairment loss was recognized as a result of the held for sale classification. The assets and liabilities held for sale are comprised of 14,756 million yen of current assets including accounts receivable and inventories, 29,182 million yen of goodwill, 19,028 million yen of other noncurrent assets including property, plant and equipment, 17,554 million yen of current liabilities including accounts payable and accrued expenses, and 2,657 million yen of noncurrent liabilities. The current and noncurrent assets and liabilities were reclassified to prepaid expenses and other current assets, other assets, other current liabilities and other liabilities in the consolidated balance sheets.

 

26. Collaborative arrangements

Sony’s collaborative arrangements primarily relate to arrangements entered into, through a subsidiary in the Pictures segment, with one or more active participants to jointly finance, produce and/or distribute motion picture or television product under which both the subsidiary and the other active participants share in the risks and rewards of ownership. These arrangements are referred to as co-production and distribution arrangements.

Sony typically records an asset for only the portion of the motion picture or television product it owns and finances. Sony and the other participants typically distribute the product in different media or markets. Revenues earned and expenses incurred for the media or markets in which Sony distributes the product are typically recorded on a gross basis. Sony typically does not record revenues earned and expenses incurred when the other participants distribute the product. Sony and the other participants typically share in the profits from the distribution of the product in all media or markets. For motion picture product, if Sony is a net receiver of (1) Sony’s share of the profits from the media or markets distributed by the other participants less (2) the other participants’ share of the profits from the media or markets distributed by Sony then the net amount is recorded as net sales. If Sony is a net payer then the net amount is recorded in cost of sales. For television product, Sony records its share of the profits from the media or markets distributed by the other participants as sales, and the other participants’ share of the profits from the media or markets distributed by Sony as cost of sales.

For the years ended March 31, 2010, 2011 and 2012, 4,687 million yen, 4,866 million yen and 10,990 million yen, respectively, were recorded as cost of sales for amounts owed to the other participants and 9,936 million yen, 10,244 million yen and 14,625 million yen, respectively, were recorded as net sales for amounts due from the other participants in these collaborative arrangements.

 

27. Commitments, contingent liabilities and other

 

(1) Commitments:

 

A. Loan commitments

Subsidiaries in the Financial Services segment have entered into loan agreements with their customers in accordance with the condition of the contracts. As of March 31, 2012, the total unused portion of the lines of credit extended under these contracts was 20,051 million yen. The aggregate amounts of future year-by-year payments for these loan commitments cannot be determined.

 

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B. Purchase commitments and other

Purchase commitments and other outstanding at March 31, 2012 amounted to 276,016 million yen. The major components of these commitments are as follows:

In the ordinary course of business, Sony makes commitments for the purchase of property, plant and equipment. As of March 31, 2012, such commitments outstanding were 35,725 million yen.

Certain subsidiaries in the Pictures segment have entered into agreements with creative talent for the development and production of motion pictures and television programming as well as agreements with third parties to acquire completed motion pictures, or certain rights therein, and to acquire the rights to broadcast certain live action sporting events. These agreements cover various periods mainly within 5 years. As of March 31, 2012, these subsidiaries were committed to make payments under such contracts of 117,187 million yen.

Certain subsidiaries in the Music segment have entered into long-term contracts with recording artists and companies for the production and/or distribution of prerecorded music and videos. These contracts cover various periods mainly within 5 years. As of March 31, 2012, these subsidiaries were committed to make payments of 41,853 million yen under such long-term contracts.

The schedule of the aggregate amounts of year-by-year payment of purchase commitments during the next five years and thereafter is as follows:

 

Fiscal year ending March 31

   Yen in millions  

2013

     141,236   

2014

     55,209   

2015

     35,330   

2016

     23,281   

2017

     13,310   

Later years

     7,650   
  

 

 

 

Total

     276,016   
  

 

 

 

In addition to the above, Sony has other commitments as follows:

On November 11, 2011, an investor group including Sony (collectively the “Group”) executed a definitive agreement with Citigroup, Inc. (“Citi”) whereby the Group will acquire EMI Music Publishing from Citi for total consideration of 2.2 billion U.S. dollars. The transaction is subject to certain closing conditions, including regulatory approvals. Upon the receipt of all necessary regulatory approvals and the resolution of all other closing conditions, Sony expects to invest approximately 325 million U.S. dollars and own approximately 38% of the newly formed entity that will ultimately acquire EMI Music Publishing from Citi, with an ability to increase the investment and ownership up to 40%.

During the fiscal year ended March 31, 2012, there was a receipt of an advance payment from a commercial customer. As a result, as of March 31, 2012, Sony recorded 15,173 million yen in other current liabilities and 35,404 million yen in other long-term liabilities based on anticipated delivery dates. The advance payment is subject to reimbursement under certain contingent conditions of the contract, including a downgrade of Sony’s credit rating by either S&P (lower than “BBB”) or Moody’s (lower than “Baa2”). The advance payment amounts will be reduced at the time of future product sales to the commercial customer.

 

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(2) Contingent liabilities:

Sony had contingent liabilities, including guarantees given in the ordinary course of business, which amounted to 78,743 million yen at March 31, 2012. The major components of these contingent liabilities are as follows:

As discussed in Note 23, Sony has agreed to repay the outstanding principal plus accrued interest up to a maximum of 303 million U.S. dollars to the creditor of the third-party investor of Sony’s U.S. based music publishing subsidiary should the third-party investor default on its obligation. The obligation of the third-party investor is collateralized by its 50% interest in Sony’s music publishing subsidiary. Should Sony have to make a payment under the terms of the guarantee, Sony would assume the creditor’s rights to the underlying collateral. At March 31, 2012, the fair value of the collateral exceeded 303 million U.S. dollars.

In May 2011, Sony Corporation’s U.S. subsidiary, Sony Electronics Inc., received a subpoena from the U.S. Department of Justice (“DOJ”) Antitrust Division seeking information about its secondary batteries business. Sony understands that the DOJ and one agency outside the United States are investigating competition in the secondary batteries market. Based on the current stage of the proceedings, it is not possible to estimate the amount of loss or range of possible loss, if any, that might result from adverse judgments, settlements or other resolution of this matter.

Beginning earlier in 2011, the network services of PlayStation®Network, Qriocity™, Sony Online Entertainment LLC and websites of other subsidiaries came under cyber-attack. As of May 31, 2012, Sony has not received any confirmed reports of customer identity theft issues or misuse of credit cards from the cyber-attacks. However, in connection with certain of these matters, Sony has received inquiries from authorities in a number of jurisdictions, including orders for reports issued by the Ministry of Economy, Trade and Industry of Japan as well as the Financial Services Agency of Japan, formal and/or informal requests for information from Attorneys General from a number of states in the United States and the U.S. Federal Trade Commission, various U.S. congressional inquiries and others. Additionally, Sony Corporation and/or certain of its subsidiaries have been named in a number of purported class actions in certain jurisdictions, including the United States. Based on the stage of these inquiries and proceedings, it is not possible to estimate the amount of loss or range of possible loss, if any, that might result from adverse judgments, settlements or other resolution of these matters.

In October 2009, Sony Corporation’s U.S. subsidiary, Sony Optiarc America Inc., received a subpoena from the DOJ seeking information about its optical disk drive business. Sony understands that the DOJ and agencies outside the United States are investigating competition in optical disk drives. Subsequently, a number of purported class action lawsuits were filed in certain jurisdictions, including the United States, in which the plaintiffs allege that Sony Corporation and certain of its subsidiaries violated antitrust laws and seek recovery of damages and other remedies. Based on the current stage of these proceedings, it is not possible to estimate the amount of loss or range of possible loss, if any, that might result from adverse judgments, settlements or other resolution of all of these matters.

In addition, Sony Corporation and certain of its subsidiaries are defendants or otherwise involved in other pending legal and regulatory proceedings. However, based upon the information currently available, Sony currently believes that the outcome of such legal and regulatory proceedings would not have a material effect on Sony’s consolidated financial statements.

 

(3) Redeemable noncontrolling interest:

As discussed in Note 24, in connection with the GSN transaction, Sony granted a put right to the Current Investor for an additional 18% interest in GSN. The put right is exercisable during three windows starting on April 1 of 2012, 2013 and 2014 and lasting for 60 business days (each such period, a “Trigger Window”). In the event that GSN’s audited financial statements for the most recently completed calendar year are not available on

 

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April 1, the Trigger Window will commence on the day when the GSN audited financial statements are delivered to the Current Investor. As of May 31, 2012, GSN’s audited financial statements for the year ended December 31, 2011 have not been delivered to the Current Investor. The exercise price of the put is calculated using a formula based on an agreed upon multiple of the earnings of GSN with a minimum price of 234 million U.S. dollars and a maximum price of 288 million U.S. dollars. The portion of the noncontrolling interest that can be put to Sony is accounted for as redeemable securities because redemption is outside of Sony’s control and is reported in the mezzanine equity section in the consolidated balance sheets at March 31, 2012.

 

(4) Product warranty liabilities:

The changes in product warranty liability for the fiscal years ended March 31, 2010, 2011 and 2012 are as follows:

 

     Yen in millions  
     Fiscal year ended March 31  
     2010     2011     2012  

Balance at beginning of the fiscal year

     57,922        50,856        54,940   

Additional liabilities for warranties

     46,686        48,610        60,073   

Settlements (in cash or in kind)

     (45,218     (36,537     (39,954

Changes in estimate for pre-existing warranty reserve

     (7,649     (4,802     (4,397

Translation adjustment

     (885     (3,187     (2,802
  

 

 

   

 

 

   

 

 

 

Balance at end of the fiscal year

     50,856        54,940        67,860   
  

 

 

   

 

 

   

 

 

 

 

28. Business segment information

The reportable segments presented below are the segments of Sony for which separate financial information is available and for which operating profit or loss amounts are evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. The CODM does not evaluate segments using discrete asset information. Sony’s CODM is its Chairman, Chief Executive Officer and President.

Sony realigned its reportable segments from the first quarter of the fiscal year ended March 31, 2012, to reflect modifications to the organizational structure as of April 1, 2011, primarily repositioning the operations of the previously reported Consumer, Professional & Devices (“CPD”) and Networked Products & Services (“NPS”) segments. In connection with this realignment, the operations of the former CPD and NPS segments are included in two newly established segments, namely the Consumer Products & Services (“CPS”) segment and the Professional, Device & Solutions (“PDS”) segment.

The CPS segment includes televisions, home audio and video, digital imaging, personal and mobile products, and the game business. The equity results of S-LCD are also included within the CPS segment. The PDS segment includes professional solutions, semiconductors and components. The Pictures segment is engaged in the development, production and acquisition, manufacture, marketing, distribution and broadcasting of image-based software, including motion picture, home entertainment and television products. The Music segment includes SME, SMEJ and a 50% owned U.S. based joint venture in the music publishing business, Sony/ATV Music Publishing LLC. The Financial Services segment primarily represents individual life insurance and non-life insurance businesses in the Japanese market, a credit financing business and a bank business in Japan. On February 15, 2012, Sony acquired Ericsson’s 50% equity interest in Sony Ericsson, which changed its name to Sony Mobile Communications upon becoming a wholly-owned subsidiary of Sony. Accordingly, the Sony Ericsson segment that had been presented as a separate segment was renamed the Sony Mobile segment in the fourth quarter. The Sony Mobile segment includes Sony’s equity in net income (loss) of Sony Ericsson through

 

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February 15, 2012 and sales, operating revenue and operating income (loss) from February 16, 2012 through March 31, 2012, as well as a gain of 102,331 million yen recorded on the remeasurement of Sony’s 50% equity interest in Sony Ericsson at fair value upon obtaining control through the acquisition of Ericsson’s 50% equity interest in Sony Ericsson. Refer to Note 24. All Other consists of various operating activities, including a mobile phone OEM business in Japan, So-net Entertainment Corporation, an Internet-related service business subsidiary operating mainly in Japan and the disc manufacturing business. Sony’s products and services are generally unique to a single operating segment. In connection with the realignment, all prior period amounts in the segment disclosures have been restated to conform to the current fiscal year’s presentation.

 

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Sales and operating revenue:

 

     Yen in millions  
     Fiscal year ended March 31  
     2010     2011     2012  

Sales and operating revenue:

      

Consumer Products & Services —

      

Customers

     3,638,137        3,771,610        3,061,214   

Intersegment

     74,228        78,223        75,543   
  

 

 

   

 

 

   

 

 

 

Total

     3,712,365        3,849,833        3,136,757   

Professional, Device & Solutions —

      

Customers

     1,080,984        1,066,574        967,603   

Intersegment

     438,002        436,690        346,168   
  

 

 

   

 

 

   

 

 

 

Total

     1,518,986        1,503,264        1,313,771   

Pictures —

      

Customers

     705,237        599,654        656,097   

Intersegment

            312        1,624   
  

 

 

   

 

 

   

 

 

 

Total

     705,237        599,966        657,721   

Music —

      

Customers

     511,097        457,771        430,751   

Intersegment

     11,519        12,972        12,038   
  

 

 

   

 

 

   

 

 

 

Total

     522,616        470,743        442,789   

Financial Services —

      

Customers

     838,300        798,495        868,971   

Intersegment

     13,096        8,031        2,924   
  

 

 

   

 

 

   

 

 

 

Total

     851,396        806,526        871,895   

Sony Mobile —

      

Customers

                   77,732   

Intersegment

                     
  

 

 

   

 

 

   

 

 

 

Total

                   77,732   

All Other —

      

Customers

     379,862        377,822        378,071   

Intersegment

     80,904        70,004        64,598   
  

 

 

   

 

 

   

 

 

 

Total

     460,766        447,826        442,669   

Corporate and elimination

     (557,368     (496,885     (450,122
  

 

 

   

 

 

   

 

 

 

Consolidated total

     7,213,998        7,181,273        6,493,212   
  

 

 

   

 

 

   

 

 

 

CPS intersegment amounts primarily consist of transactions with All Other.

PDS intersegment amounts primarily consist of transactions with the CPS segment.

The Sony Mobile segment includes sales and operating revenue from February 16, 2012 through March 31, 2012.

All Other intersegment amounts primarily consist of transactions with the Pictures segment, the Music segment and the CPS segment.

Corporate and elimination includes certain brand and patent royalty income.

 

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Segment profit or loss:

 

     Yen in millions  
     Fiscal year ended March 31  
     2010     2011     2012  

Operating income (loss):

      

Consumer Products & Services

     (101,403     10,817        (229,807

Professional, Device & Solutions

     (35,435     27,650        (20,194

Pictures

     42,814        38,669        34,130   

Music

     36,513        38,927        36,887   

Financial Services

     162,492        118,818        131,421   

Sony Mobile

     (34,514     4,155        31,407   

All Other

     (4,976     7,116        (3,546
  

 

 

   

 

 

   

 

 

 

Total

     65,491        246,152        (19,702

Corporate and elimination

     (33,719     (46,331     (47,573
  

 

 

   

 

 

   

 

 

 

Consolidated operating income (loss)

     31,772        199,821        (67,275

Other income

     43,834        44,966        23,478   

Other expenses

     (48,694     (39,774     (39,389
  

 

 

   

 

 

   

 

 

 

Consolidated income (loss) before income taxes

     26,912        205,013        (83,186
  

 

 

   

 

 

   

 

 

 

Operating income (loss) is Sales and operating revenue less Costs and expenses, and includes Equity in net income (loss) of affiliated companies.

The Sony Mobile segment includes Sony’s equity in net loss for Sony Ericsson of 57,680 million yen through February 15, 2012 and the operating income (loss) from February 16, 2012 through March 31, 2012, as well as a gain of 102,331 million yen recorded on the remeasurement of Sony’s 50% equity interest in Sony Ericsson at fair value upon obtaining control through the acquisition of Ericsson’s 50% equity interest in Sony Ericsson.

Corporate and elimination includes headquarters restructuring costs and certain other corporate expenses, including the amortization of certain intellectual property assets such as the cross-licensing intangible assets acquired from Ericsson at the time of the Sony Mobile acquisition, which are not allocated to segments.

 

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Other significant items:

 

     Yen in millions  
     Fiscal year ended March 31  
     2010     2011     2012  

Equity in net income (loss) of affiliated companies:

      

Consumer Products & Services

     387        7,214        (64,078

Professional, Device & Solutions

     (1,034     (130     (198

Pictures

     4,347        2,483        (516

Music

     (80     (265     (372

Financial Services

     (1,345     (1,961     (1,252

Sony Mobile

     (34,514     4,155        (57,680

All Other

     2,004        2,566        2,399   
  

 

 

   

 

 

   

 

 

 

Consolidated total

     (30,235     14,062        (121,697
  

 

 

   

 

 

   

 

 

 

Depreciation and amortization:

      

Consumer Products & Services

     100,710        68,579        69,717   

Professional, Device & Solutions

     142,411        122,057        124,956   

Pictures

     8,427        7,996        10,825   

Music

     13,427        12,166        10,789   

Financial Services, including deferred insurance acquisition costs

     56,531        62,077        56,322   

Sony Mobile

                   869   

All Other

     22,452        20,805        16,656   
  

 

 

   

 

 

   

 

 

 

Total

     343,958        293,680        290,134   

Corporate

     27,046        31,686        29,460   
  

 

 

   

 

 

   

 

 

 

Consolidated total

     371,004        325,366        319,594   
  

 

 

   

 

 

   

 

 

 

The Sony Mobile segment includes Sony’s equity in net income (loss) in Sony Ericsson through February 15, 2012 and the equity in net income (loss) of Sony Mobile from February 16, 2012 through March 31, 2012.

The Sony Mobile segment includes the depreciation and amortization from February 16, 2012 through March 31, 2012.

 

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The following table includes a breakdown of sales and operating revenue to external customers by product category in the CPS and PDS segments. The CPS and PDS segments are each managed as a single operating segment by Sony’s management.

 

     Yen in millions  
     Fiscal year ended March 31  
     2010      2011      2012  

Sales and operating revenue:

        

Consumer Products & Services

        

Televisions

     1,005,773         1,200,491         840,359   

Home Audio and Video

     302,678         285,297         241,885   

Digital Imaging

     664,502         642,570         497,957   

Personal and Mobile Products

     809,369         828,375         722,301   

Game

     840,711         798,405         744,285   

Other

     15,104         16,472         14,427   
  

 

 

    

 

 

    

 

 

 

Total

     3,638,137         3,771,610         3,061,214   

Professional, Device & Solutions

        

Professional Solutions

     295,360         287,394         280,645   

Semiconductors

     299,715         358,396         375,891   

Components

     476,097         410,090         297,108   

Other

     9,812         10,694         13,959   
  

 

 

    

 

 

    

 

 

 

Total

     1,080,984         1,066,574         967,603   

Pictures

     705,237         599,654         656,097   

Music

     511,097         457,771         430,751   

Financial Services

     838,300         798,495         868,971   

Sony Mobile

                     77,732   

All Other

     379,862         377,822         378,071   

Corporate

     60,381         109,347         52,773   
  

 

 

    

 

 

    

 

 

 

Consolidated total

     7,213,998         7,181,273         6,493,212   
  

 

 

    

 

 

    

 

 

 

The Sony Mobile segment includes sales and operating revenue from February 16, 2012 through March 31, 2012.

 

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Geographic Information:

Sales and operating revenue attributed to countries based on location of external customers for the fiscal years ended March 31, 2010, 2011 and 2012 and property, plant and equipment, net as of March 31, 2011 and 2012 are as follows:

 

     Yen in millions  
     Fiscal year ended March 31  
     2010      2011      2012  

Sales and operating revenue:

        

Japan

     2,099,297         2,152,552         2,104,669   

United States

     1,595,016         1,443,693         1,211,849   

Europe

     1,644,698         1,539,432         1,268,258   

China

     485,512         562,048         495,101   

Asia-Pacific

     708,061         726,364         636,489   

Other Areas

     681,414         757,184         776,846   
  

 

 

    

 

 

    

 

 

 

Total

     7,213,998         7,181,273         6,493,212   
  

 

 

    

 

 

    

 

 

 

 

     Yen in millions  
     March 31  
     2011      2012  

Property, plant and equipment, net:

     

Japan

     684,031         699,647   

United States

     95,157         82,914   

Europe

     39,602         55,192   

China

     39,936         39,388   

Asia-Pacific

     46,894         37,060   

Other Areas

     19,248         16,797   
  

 

 

    

 

 

 

Total

     924,868         930,998   
  

 

 

    

 

 

 

Geographic information for the fiscal years ended March 31, 2010 and 2011 in the tables above has been restated to reflect the change in geographic classification.

Major areas in each geographic segment excluding Japan, United States and China are as follows:

 

(1) Europe:    United Kingdom, France, Germany, Russia, Spain and Sweden
(2) Asia-Pacific:    India, South Korea and Oceania
(3) Other Areas:    The Middle East/Africa, Brazil, Mexico and Canada

There are not any individually material countries with respect to the sales and operating revenue and property, plant and equipment, net included in Europe, Asia-Pacific and Other Areas.

Transfers between reportable business segments or geographic areas are made at amounts which Sony’s management believes approximate as arms-length transactions.

There were no sales and operating revenue with any single major external customer for the fiscal years ended March 31, 2010, 2011 and 2012.

 

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SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

 

     Yen in millions  
     Balance
at beginning
of period
     Additions
charged to
costs and
expenses
     Deductions
(Note 1)
    Other
(Note 2)
    Balance
at end
of period
 

Fiscal year ended March 31, 2010:

            

Allowance for doubtful accounts and sales returns

     110,383         59,987         (61,577     (4,318     104,475   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Fiscal year ended March 31, 2011:

            

Allowance for doubtful accounts and sales returns

     104,475         50,345         (55,106     (9,183     90,531   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Fiscal year ended March 31, 2012:

            

Allowance for doubtful accounts and sales returns

     90,531         33,441         (49,509     (3,454     71,009   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Notes:

 

1. Reversal including amounts written off.

 

2. Translation adjustment.

 

     Balance
at beginning
of period
(Note 1)
     Additions
(Note 2)
     Deductions     Other
(Note 3)
    Balance
at end
of period
(Note 1)
 

Fiscal year ended March 31, 2010:

            

Valuation allowance — Deferred tax assets

     120,512         48,372         (40,210     (2,421     126,253   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Fiscal year ended March 31, 2011:

            

Valuation allowance — Deferred tax assets

     126,253         381,837         (28,736     (5,641     473,713   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Fiscal year ended March 31, 2012:

            

Valuation allowance — Deferred tax assets

     473,713         469,788         (22,904     (52,364     868,233   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Note:

 

1. As discussed in Note 21 of the consolidated financial statements, the presentation of deferred income taxes in the consolidated balance sheets have been revised to conform with the presentation as of March 31, 2012, which impacted the presentation of the valuation allowance for the previous fiscal years.

 

2. Including a valuation allowance against deferred tax assets which Sony Ericsson had prior to its acquisition during the fiscal year ended March 31, 2012. Refer to Note 21 of the consolidated financial statements.

 

3. Translation adjustment and the effect of changes in statutory tax rate.

 

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SONY MOBILE COMMUNICATIONS

 

 

Consolidated Financial Statements of Sony Mobile Communications AB

 

 

 

 

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SONY MOBILE COMMUNICATIONS

Table of contents

 

Consolidated Income Statements

     A-4   

Consolidated Balance Sheets

     A-5   

Consolidated Cash Flow

     A-6   

Notes to the Consolidated Financial Statements

     A-7   

 

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SONY MOBILE COMMUNICATIONS

 

Consolidated Income Statements

 

 

January 1 - December 31, TEUR

 

      Notes    2011     2010     2009  

Net sales

   C2      5,212,295        6,293,782        6,788,152   

Cost of sales

        (3,734,983     (4,440,285     (5,781,797
   

GROSS PROFIT

        1,477,312        1,853,497        1,006,355   

Selling expenses

        (510,761     (479,150     (583,412

General and Administration expenses

   C24      (389,211     (413,474     (442,543

Research and Development expenses

        (815,014     (839,570     (1,045,784

Other operating revenues

   C3      31,781        38,181        48,053   

Other operating expenses

   C3      (135            (523
   

OPERATING PROFIT (LOSS)

   C6,C7,C15

C16,C22,C23

     (206,028     159,484        (1,017,854

Interest income and similiar profit items

   C4      18,990        17,798        21,324   

Interest expense and similiar loss items

   C4      (55,854     (29,981     (46,146
   

NET PROFIT (LOSS) BEFORE TAXES

        (242,892     147,301        (1,042,676

Income taxes for the year

   C5      18,859        (48,326     235,569   

Minority interest

        (23,127     (8,508     (28,720
   

NET PROFIT (LOSS) FOR THE YEAR

        (247,160     90,468        (835,827

 

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SONY MOBILE COMMUNICATIONS

 

Consolidated Balance Sheets

 

 

December 31, TEUR

 

      Notes    2011     2010  

ASSETS

       

Non-current assets

       

Intangible assets

   C6      75,495        12,211   

Tangible assets

   C7      157,306        135,334   

Financial assets

   C8      889,201        655,868   

Total non-current assets

          1,122,002        803,413   

Current assets

       

Inventories

   C9      446,732        460,357   

Accounts receivable

   C10      691,862        835,949   

Other current assets

   C11      379,999        295,046   

Other short-term cash investments

   C12      270,443        276,168   

Cash and bank

          171,600        328,516   

Total current assets

          1,960,636        2,196,036   

Total assets

          3,082,638        2,999,449   

SHAREHOLDERS’ EQUITY AND LIABILITIES

       

Shareholders’ equity

   C13     

Restricted equity

       

Share capital

        100,000        100,000   

Restricted reserves

          479,752        467,998   

Total restricted equity

          579,752        567,998   

Unrestricted equity

       

Non-restricted reserves

        (23,282     (126,741

Net profit (loss) for the year

          (247,160     90,468   

Total unrestricted equity

          (270,442     (36,273

Total equity

          309,310        531,725   

Minority interest

        58,098        42,286   

Provisions

       

Post-employment benefits

   C16      35,699        24,466   

Other provisions

   C14      449,358        391,370   

Total provisions

          485,057        415,836   

LIABILITIES

       

Long-term liabilities

       

Liabilities to financial institutions

   C17,C26             100,000   

Other long-term liabilities

   C17      8,649        7,838   

Total long-term liabilities

          8,649        107,838   

Current liabilities

       

Liabilities to financial institutions

   C26      745,427        133,081   

Advances from customers

        7,419        2,668   

Accounts payable

        675,336        768,747   

Income tax liabilities

        36,830        51,751   

Other current liabilities

   C18      756,512        945,517   

Total current liabilities

          2,221,524        1,901,764   

Total shareholders’ equity and liabilities

          3,082,638        2,999,449   

Assets pledged as collateral

   C19      160        27   

Contingent liabilities

   C20      8,383        3,603   

 

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Consolidated Cash Flow

 

 

January 1 - December 31, TEUR

 

      Notes    2011     2010     2009  

OPERATING ACTIVITIES

         

Net profit (loss) for the year

        (247,160     90,468        (835,827

Depreciation

        71,725        76,452        105,760   

Adjustment to reconcile net income to cash

   C21      (130,896     (231,527     (217,828
        (306,331     (64,607     (947,895

Change in inventories

        7,790        (75,724     171,563   

Change in accounts receivable

        141,757        56,990        812,827   

Change in other receivables

        (79,209     98,095        226,105   

Change in accounts payable

        (103,761     (142,732     (133,490

Change in other liabilities

          (197,906     (119,227     (456,846

Cash flow from operating activities

          (537,660     (247,205     (327,736

INVESTING ACTIVITIES

         

Investments in intangible assets

        (45,416     (4,685     (4,247

Sales of intangible assets

        130        144        164   

Investments in tangible assets

        (81,610     (57,059     (54,379

Sales of tangible assets

        2,180        22,142        6,975   

Change in temporary investments

                 35,000        (35,000

Cash flow from investing activities

          (124,716     (4,458     (86,487

FINANCING ACTIVITIES

         

Borrowing

        1,457,674        560,463        260,428   

Repayment of debt

        (953,334     (597,683     (53,919

Dividend to minority

          (8,442     (22,693     (35,603

Cash flow from financing activities

          495,898        (59,913     170,906   

Net change in cash

        (166,478     (311,576     (243,317

Cash, beginning of period

        604,684        878,119        1,124,877   

Translation difference in Cash

          3,838        38,141        (3,441

Cash, end of period

          442,044        604,684        878,119   

 

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Notes to the Consolidated Financial Statements

 

 

 

Contents

  
C1.    Accounting Principles      A-8   
C2.    Net sales by market area      A-12   
C3.    Other operating revenues and other operating expenses      A-13   
C4.    Financial income and expenses      A-13   
C5.    Taxes      A-13   
C6.    Intangible assets      A-15   
C7.    Tangible assets      A-16   
C8.    Financial assets      A-17   
C9.    Inventory      A-17   
C10.    Accounts receivable      A-17   
C11.    Other current assets      A-17   
C12.    Short term cash investments      A-17   
C13.    Shareholders’ equity      A-18   
C14.    Provisions      A-18   
C15.    Restructuring costs      A-19   
C16.    Post-employment benefits      A-19   
C17.    Long-term liabilities      A-20   
C18.    Other current liabilities      A-20   
C19.    Assets pledged as collateral      A-21   
C20.    Contingent liabilities      A-21   
C21.    Adjustments to reconcile net income to cash      A-21   
C22.    Leasing      A-21   
C23.    Wages, salaries and social security expenses      A-22   
C24.    Fees to auditors      A-23   
C25.    Financial risks      A-23   
C26.    Liabilities to financial institutions      A-24   
C27.    Group companies      A-25   
C28.    Post-closing events      A-25   
C29.    Reconciliation to accounting principles generally accepted in the United States      A-25   

 

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C1.    Accounting Principles

The consolidated financial statements of Sony Mobile Communications AB and its subsidiaries are prepared in accordance with accounting principles generally accepted in Sweden, applying the Swedish Annual Accounts Act (ÅRL), the Swedish Accounting Standards Board’s recommendations (Bokföringsnämnden, BFN) and the Recommendation of the Swedish Financial Accounting Standards Council, RR 29 Remunerations to employees. The accounting principles are unchanged since last year. Figures in parentheses in the disclosures refer to 2010.

During 2011 Sony Mobile Communications was a joint venture between Sony Corporation (“Sony”) and Telefonaktiebolaget LM Ericsson (“Ericsson”). In October 2011, Sony agreed with Ericsson to acquire Ericsson’s 50 percent equity interest in Sony Mobile Communications, making the joint venture a wholly-owned subsidiary of Sony. The equity transaction was completed in February 2012 and the company’s name was changed from Sony Ericsson Mobile Communications AB to Sony Mobile Communications AB.

Principle of Consolidation

The consolidated financial statements include the accounts of the Parent Company and all subsidiaries in which the company has a voting majority. The intercompany transactions and internal profit have been eliminated. The consolidated financial statements have been prepared in accordance with the purchase method, whereby consolidated stockholders’ equity includes equity earned only after acquisition. Minority interest in net earnings is reported in the consolidated income statement. Minority interest in the equity of subsidiaries is reported as a separate item in the consolidated balance sheet.

Translation of financial statements in foreign currency

Sony Mobile Communications’ results are presented in EUR which is the reporting currency and the functional currency of the parent company. The group has sales and cost of sales in a large number of currencies. For all companies, including subsidiary companies, the functional (business) currency is the currency in which the companies primarily generate and expend cash. Their financial statements plus goodwill related to such companies are translated to EUR by translating assets and liabilities at the closing rate on the balance sheet day and income statement items at average exchange rates, during the year, with translation adjustments reported directly in consolidated equity.

Revenue recognition

Sales revenue is recorded upon the delivery of products according to contractual terms and represents amounts realized, excluding value-added tax, and is net of goods expected to be returned, trade discounts and allowances. Sales revenue is recognized with reference to all significant contractual terms when the product has been delivered, when the revenue amount is fixed or determinable and when collection is reasonably assured.

Accruals for sales bonuses and similar items such as quarterly and yearly bonuses, quality bonus, co-op advertising and stock protection are shown as deductions from gross sales to arrive at net sales.

For product and equipment sales, revenue recognition generally does not occur until the products or equipment have been shipped, risk of loss has transferred to the customer, and objective evidence exists that customer acceptance provisions, if any, have been met. The Company records revenue when allowances for discounts, price protection, returns and customer incentives can be reliably estimated. Recorded revenues are reduced by these allowances. The Company bases its estimates on historical experience taking into consideration the type of products sold, the type of customer, and the type of transaction specific in each arrangement.

Costs related to shipping and handlings are included in cost of sales in the Consolidated Income Statement.

 

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Research and development costs

Research and development costs are charged to expenses as incurred. Expenses related to the third party development of new platforms for mobile phones are capitalized as other non-current asset and are amortized when the platforms are put into commercial use. Such costs are capitalized as intangible assets when technological feasibility has been established and when future economic benefits can be demonstrated.

Hedge accounting

The Group applies hedge accounting, by electing the fair value option in accordance with the Swedish Annual Accounts Act 4:14, for financial instruments intended to hedge foreign currency exposures having a future impact on results.

At the point in time at which the contract is established, the relationship between the hedging instrument and the hedged item is documented, as well as the purpose of this risk management and the strategy for taking various hedging measures. The company also documents its assessment, both when the contract is entered into and on an ongoing basis, as to whether the derivative used in the hedging transaction is effective in counteracting changes in fair value or income statement effects, in terms of the hedged items in question.

The hedging is designed in such a manner as to ensure, to the greatest degree possible, its effectiveness. The changes in fair value for those derivative instruments which do not meet the conditions for hedge accounting are reported directly in the income statement.

Future foreign currency exposures are hedged primarily by forward cover agreements but also via currency options. The effective portion of changes in the fair value of hedging instruments is recognized in equity. Any gain or loss relating to the ineffective portion is recognized in the income statement. Amounts accumulated in equity are recycled in the income statement in the periods in which the hedged item affects profit or loss, for example, when the forecasted sale which is hedged takes place.

Intangible and tangible fixed assets

Intangible and tangible fixed assets are stated at cost less accumulated depreciation and impairment losses as well as write-ups. Annual depreciation is reported as plan depreciation, generally using the straight line method with estimated useful lives ranging from 3 years up to 10 years for machineries and equipments. Intangible assets are amortized over a period ranging from 3 years up to 5 years or based on the contract’s economic reality. Land improvements are amortized over 20 years. The costs of computer software developed or obtained for internal use are capitalized as intangible assets when technological feasibility has been established and when future economic benefits can be demonstrated.

Tooling

Tooling owned by Sony Mobile Communications but used in its manufacturing partners operations is capitalized and amortized over the useful life of the tools.

Financial assets

Financial assets that are intended for long-term holding are accounted at acquisition value and impairment is made if a permanent decrease in the value can be stated. These assets include strategic long-term investments in private companies over which Sony Mobile Communications does not have the ability to exercise significant influence.

 

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Impairment test of assets

Impairment tests are performed on a regular basis whenever there is an indication of possible impairment. An impairment loss is determined based on the amount by which the carrying value exceeds the fair value of those assets.

Leases

Leases on terms in which Sony Mobile Communications assumes substantially all the risks and rewards of ownership are classified as finance leases, i.e. the leased object is recognized as a non-current asset and the future obligations for lease payments are recognized as current and non-current liabilities in the Balance Sheet. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset, although the depreciation period would not exceed the lease term.

Leasing agreements which are not classified as financial leases are classified as operational leases, and the leased assets under such contracts are not recognized in the balance sheet. Costs under operating leases are recognized in the Income Statement on a straight-line base over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease. Sony Mobile Communications has not identified any material financial leases for the reported periods.

Income tax

Reported income tax includes tax, which is to be paid or received, regarding the current year, adjustments concerning the previous years’ current taxes and changes in deferred taxes.

All income tax liabilities and receivables are valued at their nominal amount according to the tax regulations and are measured at the tax rate that is expected to be applied to the temporary differences when they are reversed, based on the tax laws that have been enacted or substantively enacted by the reporting date. An adjustment of deferred tax asset/liability balances due to a change in the tax rate is recognized in the income statement unless it relates to a temporary difference earlier recognized directly in equity, in which case the adjustment is also recognized in equity.

In the case of items reported in the income statement, the related tax effects are also reported in the income statement. The tax effects of items that are accounted for directly against equity are also reported directly against equity.

Deferred tax is calculated according to the balance sheet method on all temporary differences arising between the reported value and the tax value of the assets and liabilities.

Deferred tax assets are recognized to the extent that is likely that future taxable profit will be available, against which the temporary difference can be utilized.

Receivables

Receivables with maturities greater than 12 months after balance sheet date are reported as fixed assets, and other receivables as current assets. Receivables are reported in the amounts at which they are expected to be received, on the basis of individual assessment.

Accounts Receivable

Accounts receivable are reported as current assets in the amounts at which they are expected to be received net of individual bad debt assessment.

 

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Inventories

Inventories, which include the cost of materials, labor and overheads, are measured at the lower of cost or net realizable value on a first-in, first-out (FIFO) basis. Risk of obsolescence has been measured by estimating market value based on future customer demand and customer acceptance of new products.

Borrowings

Borrowings are reported initially at fair value, net of transaction costs incurred. If the reported amount differs from the amount to be repaid at maturity date, then the difference is allocated as interest expense or interest income over the tenor of the loan. In this manner, the initial amount reported agrees, at maturity date, with the amount to be repaid.

Financial liabilities first cease to be reported when they have been settled on the basis of repayment or when repayment has been waived.

All transactions are reported on settlement date.

Provisions

Provisions are made when there are legal or constructive obligations as a result of past events and when it is probable that an outflow of resources will be required to settle the obligations and the amounts can be reliably estimated. However, the actual outflow as a result of the obligation may differ from such estimate.

Warranty provisions include provisions for faulty products based on estimated return rates and costs. The best estimate is based on sales, contractual warranty periods and historical failure data of products sold.

Post-employment benefits

The Group has both defined benefit and defined contribution plans.

A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further contributions. The contributions are recognized as employee benefit expenses when they are due.

A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee or former employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The Group is responsible for the fulfillment of the pension obligation.

The schemes are both funded and unfunded.

The liability or receivable recognized in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, unrecognized actuarial gains and losses and unrecognized past service cost.

Independent actuaries using the Projected Unit Credit Method calculate the defined benefit obligations and expenses annually. This method indicates that past-service costs are amortized on a straight-line basis over the vesting period. The present value of the defined benefit obligation is determined by discontinuing the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability.

Actuarial gains and losses, arising from experience adjustments and changes in actuarial assumptions, to the extent theses exceed 10% of the pension obligations’ present value or the fair value of plan assets are charged or credited to income over the employees’ expected average remaining period of service.

 

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The principle described above for defined benefit plans is applied in the consolidated financial statements. The Parent Company has pension commitments in Sweden for white collar workers secured through an insurance solution with the insurance company Alecta. According to a statement issued by the Swedish Financial Reporting Board (UFR 3), this constitutes a multi-employer plan and should be accounted for as a defined benefit plan, as prescribed in RR 29 and UFR 6. Alecta cannot, however, provide the information required for the accounting of a defined benefit plan, as described in UFR 6. The Alecta plan is therefore accounted for as a defined contribution plan as prescribed in UFR6.

Contingent liabilities

The Group records a Contingent liability when there is a possible obligation arising from past events, and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. Contingent liabilities are also reported when there is a present obligation arising from past events but are not recognized, as it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or when the amount of the obligation cannot be measured with sufficient reliability.

Statement of Cash Flow

Foreign subsidiaries’ transactions are translated at the average exchange rate of the period. Subsidiaries purchased and/or sold, net of cash acquired/sold, are reported as cash flow from investment activities and do not affect reported cash flow from operations. Cash and cash equivalents consist of cash and bank and short term cash investments with a maturity less than three months. Bank deposits with an initial maturity over three months are not included in cash and cash equivalents. The statement of Cash Flow for 2009, 2010 and 2011 complies with International Accounting Standards (IAS) No. 7.

Related party transactions

Transactions and balances related to Sony and Ericsson are classified as external items.

Disposition of earnings

Each year the Board of Directors assesses the parent company and the group’s results and financial position in order to determine the appropriate disposition of earnings. This disposition, including any payment of dividends, is based on a number of factors including: the latest profit and loss account, the parent company’s equity, the parent company’s and the group’s cash flows, the equity ratio and liquidity of the parent company and the group after the proposed dividend in relation to the industry standards in which the parent company and the group conducts its business, and both the parent company’s and the group’s ability to fulfill both their short and long-term obligations. The Board of Directors resolved that the accumulated deficit, EUR -327,246,174, whereof net loss for the year EUR -215,631,869, will be carried forward.

C2.    Net sales by market area

 

     2011      2010      2009  

Europe, Middle East & Africa

     1,970,358         3,218,638         3,744,278   

Americas

     664,495         851,203         849,577   

Asia Pacific

     2,577,442         2,223,941         2,194,297   
  

 

 

    

 

 

    

 

 

 

Total

     5,212,295         6,293,782         6,788,152   

 

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C3.    Other operating revenues and other operating expenses

 

     2011     2010      2009  

Other operating revenues

       

Gains on sales of intangible and tangible assets

     231        4,731         146   

Commissions, license fees and other operating

     31,550        33,450         47,907   
  

 

 

   

 

 

    

 

 

 

Total other operating revenues

     31,781        38,181         48,053   

Other operating expenses

       

Losses on sales of intangible and tangible assets

     (135             (523
  

 

 

   

 

 

    

 

 

 

Total other operating expenses

     (135             (523

C4.    Financial income and expenses

 

     2011     2010     2009  

Interest income and similar profit items

      

Interest income external

     14,631        13,498        16,909   

Foreign exchange gains

     3,193        1,824        2,363   

Other financial income

     1,166        2,477        2,052   
  

 

 

   

 

 

   

 

 

 

Total

     18,990        17,798        21,324   

Interest expense and similar loss items

      

Interest expenses external

     (45,568     (25,820     (36,264

Foreign exchange losses

     (7,065     (1,935     (2,954

Other financial expenses

     (3,221     (2,226     (6,929
  

 

 

   

 

 

   

 

 

 

Total

     (55,854     (29,981     (46,146

Financial Net

     (36,864     (12,183     (24,822

C5.    Taxes

Income statement

The following items are included in income taxes for the year:

 

     2011     2010     2009  

Current income taxes for the period

     (205,993     (79,657     (32,075

Deferred tax income/ (-expense) related to temporary differences and tax loss carry forwards

     224,852        31,331        267,645   
  

 

 

   

 

 

   

 

 

 

Income taxes for the period

     18,859        (48,326     235,569   

 

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A reconciliation between actual tax income (-expense) for the year and the theoretical tax income (-expense) that would arise when applying statutory tax rate in Sweden, 26.3% on income before taxes is shown in the table:

 

     2011     2010     2009  

Income before taxes

     (242,892     147,301        (1,042,676

Tax rate in Sweden, 26.3%

     63,881        (38,740     273,653   

Effect of foreign tax rates

     (14,517     (10,974     (8,938

Current income taxes related to prior years

     (16,221     (79     (7,640

Tax effect of expenses that are non deductible for tax purpose

     (19,884     (12,336     (16,942

Tax effect of income that are non-taxable for tax purpose

     7,830        13,024        3,619   

Tax effect of changes in tax rates

     (2,230     779        (7,923

Change in valuation allowance

                   (260
  

 

 

   

 

 

   

 

 

 

Income taxes for the year

     18,859        (48,326     235,569   

Balance sheet

Tax effect of temporary differences, including tax loss carry forward, has resulted in deferred tax assets as follows:

 

     2011      2010  

Deferred tax assets

     853,276         628,687   

Deferred tax assets relate to temporary differences due to certain provisions such as warranty and scrap liabilities and tax losses carry forwards. Deferred tax assets are amounts recognized in countries where we expect to be able to generate corresponding taxable income in the future to benefit from tax reductions.

TEUR 694,376 (TEUR 460,650) of the deferred tax assets refers to tax loss carry-forwards and has been tested against future earning capacity. The deferred tax asset is valued at the full amount, given that the company believes that there are strong indications that future taxable profits will be available. These indicators include the future business plan and expected effects from the change in ownership. The value of the future taxable profits may differ with regard to future business environment and earnings capacity or changes in tax law.

The vast majority of the tax loss carry-forwards are related to countries with long or indefinite periods of utilization, mainly Sweden where there is no limitation in time regarding tax loss carry forward.

 

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C6.    Intangible assets

 

2011

   Licenses, software
trademarks and
similar rights
    Patents     Total  

Accumulated acquisition costs

      

Opening balance January 1

     111,244        3,978        115,222   

Acquisitions

     45,416               45,416   

Sales/disposals

     (14,668            (14,668

Translation difference for the year

     3,287               3,287   

Reclassification from other non current assets

     24,480               24,480   
  

 

 

   

 

 

   

 

 

 

Closing balance December 31

     169,759        3,978        173,737   

Accumulated depreciation

      

Opening balance January 1

     (99,033     (3,978     (103,011

Depreciation

     (6,705            (6,705

Sales/disposals

     14,538               14,538   

Translation difference for the year

     (3,064            (3,064
  

 

 

   

 

 

   

 

 

 

Closing balance December 31

     (94,264     (3,978     (98,242

Net carrying value

     75,495               75,495   

 

2010

   Licenses, software
trademarks and
similar rights
    Patents     Total  

Accumulated acquisition costs

      

Opening balance January 1

     130,979        3,978        134,957   

Acquisitions

     4,685               4,685   

Sales/disposals

     (32,866            (32,866

Translation difference for the year

     8,446               8,446   
  

 

 

   

 

 

   

 

 

 

Closing balance December 31

     111,244        3,978        115,222   

Accumulated depreciation

      

Opening balance January 1

     (114,372     (3,978     (118,350

Depreciation

     (10,248            (10,248

Sales/disposals

     32,722               32,722   

Translation difference for the year

     (7,135            (7,135
  

 

 

   

 

 

   

 

 

 

Closing balance December 31

     (99,033     (3,978     (103,011

Net carrying value

     12,211               12,211   

 

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C7.    Tangible assets

 

2011

   Land and
buildings
    Machinery     Other
equipment
    Total  

Accumulated acquisition costs

        

Opening balance January 1

     57,425        143,980        432,209        633,614   

Acquisitions

     5,767        26,898        48,945        81,610   

Sales/disposals

     (150     (8,750     (24,639     (33,539

Translation difference for the year

     3,571        10,191        21,812        35,573   
  

 

 

   

 

 

   

 

 

   

 

 

 

Closing balance December 31

     66,613        172,319        478,327        717,258   

Accumulated depreciation

        

Opening balance January 1

     (17,952     (96,480     (364,704     (479,136

Depreciation

     (7,154     (18,632     (39,234     (65,020

Sales/disposals

     138        8,239        22,725        31,102   

Translation difference for the year

     (1,570     (6,438     (19,425     (27,433
  

 

 

   

 

 

   

 

 

   

 

 

 

Closing balance December 31

     (26,538     (113,311     (400,638     (540,487

Accumulated revaluations

        

Opening balance January 1

     (11,051     (4,752     (3,342     (19,145

Write down

            (24     (94     (118

Sales/disposal

            353               353   

Translation difference for the year

     (154     (402            (556
  

 

 

   

 

 

   

 

 

   

 

 

 

Closing balance December 31

     (11,205     (4,825     (3,436     (19,465

Net carrying value

     28,870        54,183        74,253        157,306   

 

2010

   Land and
buildings
    Machinery     Other
equipment
    Total  

Accumulated acquisition costs

        

Opening balance January 1

     53,911        149,756        399,631        603,298   

Acquisitions

     7,045        11,816        38,198        57,059   

Sales/disposals

     (8,392     (29,530     (54,555     (92,477

Translation difference for the year

     4,861        11,938        48,935        65,734   
  

 

 

   

 

 

   

 

 

   

 

 

 

Closing balance December 31

     57,425        143,980        432,209        633,614   

Accumulated depreciation

        

Opening balance January 1

     (14,290     (94,395     (322,829     (431,514

Depreciation

     (6,977     (18,696     (40,531     (66,204

Sales/disposals

     4,690        25,518        40,926        71,134   

Translation difference for the year

     (1,374     (8,906     (42,270     (52,550
  

 

 

   

 

 

   

 

 

   

 

 

 

Closing balance December 31

     (17,952     (96,480     (364,704     (479,136

Accumulated revaluations

        

Opening balance January 1

     (10,139     (8,846     (3,124     (22,109

Write down

            (2,180     (399     (2,578

Sales/disposal

            3,742        191        3,933   

Translation difference for the year

     (912     2,532        (10     1,609   
  

 

 

   

 

 

   

 

 

   

 

 

 

Closing balance December 31

     (11,051     (4,752     (3,342     (19,145

Net carrying value

     28,423        42,748        64,163        135,334   

 

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C8.    Financial assets

 

     2011      2010  

Deferred tax assets

     853,276         628,687   

Other non-current assets

     35,925         27,181   
  

 

 

    

 

 

 

Total

     889,201         655,868   

The main part of other non-current assets is a non-current tax receivable. Previous year the main part of other non-current assets was prepaid licenses. The prepaid licenses have been reclassified as intangible assets.

C9.    Inventory

 

     2011      2010  

Raw material and manufacturing work in process

     267,758         230,610   

Finished products and goods for resale

     178,974         229,747   
  

 

 

    

 

 

 

Inventories, net

     446,732         460,357   

Reported amounts are net of obsolescence reserves by TEUR 81,646 (TEUR 64,219).

C10.    Accounts receivable

 

     2011     2010  

Commercial receivables

     702,628        857,245   

Provision for doubtful debts

     (10,766     (21,296
  

 

 

   

 

 

 

Total

     691,862        835,949   

Provisions for doubtful debts have been estimated based on commercial risk evaluations and existing credit insurance agreements have been considered.

C11.    Other current assets

 

     2011      2010  

Prepaid expenses

     34,025         54,323   

Current tax assets

     35,520         44,579   

Prepaid tooling

     12,363         5,675   

VAT receivables

     76,194         72,042   

Other receivables

     221,897         118,427   
  

 

 

    

 

 

 

Total

     379,999         295,046   

C12.    Short term cash investments

 

     2011      2010  

Net book value

     270,443         276,168   

Market value

     270,443         276,168   

Short term cash investments are held in money-market funds.

 

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C13.    Shareholders’ equity

 

     Share
capital
     Restricted
reserves
     Non-
restricted
reserves and
net profit/loss
for the year
    Total
shareholders’
equity
 

Shareholder’s equity December 31, 2009

     100,000         442,576         (161,536     381,040   

Changes in cumulative translation adjustments

             25,266         26,514        51,780   

Fair value reserve

                     8,437        8,437   

Transfer between non-restricted and restricted reserves

             156         (156       

Net income for the year

                     90,468        90,468   
  

 

 

    

 

 

    

 

 

   

 

 

 

Shareholder’s equity December 31, 2010

     100,000         467,998         (36,273     531,725   

Changes in cumulative translation adjustments

             11,737         6,386        18,123   

Fair value reserve

                     6,622        6,622   

Transfer between non-restricted and restricted reserves

             17         (17       

Net income for the year

                     (247,160     (247,160
  

 

 

    

 

 

    

 

 

   

 

 

 

Shareholder's equity December 31, 2011

     100,000         479,752         (270,442     309,310   

Share capital consists of 100,000,200 shares at a quota value of EUR 1 per share.

Cumulative translation adjustments have been distributed among unrestricted and restricted stockholder’s equity.

The fair value reserve is related to the effective portion of changes in the fair value of hedging instruments that is recognized in equity. Amounts accumulated in equity are recycled in the income statement in the periods in which the hedged item affects profit or loss, for example, when the forecasted sale which is hedged takes place. The closing balance for fair value reserve after taxes is TEUR 19,025 (TEUR 12,403) and is part of non-restricted reserves.

The transfer between non-restricted and restricted reserves is in accordance with the proposals of the respective companies’ boards of directors. In evaluating the consolidated financial position, it should be noted that earnings in foreign companies may be subject to taxation when transferred to Sweden and, in some instances, such transfer of earnings may be limited by currency restrictions.

C14.    Provisions

 

     2011      2010  

Warranty commitments

     150,891         268,206   

Restructuring expenses

     115,489         70,957   

Other provisions

     182,978         52,207   
  

 

 

    

 

 

 

Total

     449,358         391,370   

Warranty commitments include provisions for faulty products based on estimated return rates and costs. The best estimate is based on sales, contractual warranty periods and historical failure data of products sold.

 

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C15.    Restructuring costs

 

     2011     2010     2009  

Cost of sales

            (31,842     (39,285

Selling expenses

     (16,478     (3,025     (16,198

Administration expenses

     (20,966     (13,761     (24,890

Research and development expenses

     (55,376     6,542        (83,903
  

 

 

   

 

 

   

 

 

 

Total

     (92,820     (42,086     (164,276

where of;

      

Write down of assets

            (1,597     (26,325

Redundancy expenses

     (91,467     (2,777     (87,947

Rental agreements

            (6,317     (16,933

Supplier related expenses

            (18,833     (31,168

Other

     (1,353     (12,562     (1,903
  

 

 

   

 

 

   

 

 

 

Total

     (92,820     (42,086     (164,276

The restructuring costs are related to cost saving programmes announced and launched during 2008, 2009 and 2011.

C16.    Post-employment benefits

Sony Mobile Communications participates in local pension plans in countries in which we operate. There are principally two types of pension plans:

 

   

Defined contribution plans, where the Company’s only obligation is to pay fixed pension premiums into a separate entity (a fund or insurance company) on behalf of the employee. No provision for pensions is recognized in the balance sheet other than accruals for premium pensions earned, but not yet paid.

 

   

Defined benefit plans, where the Company’s undertaking is to provide pension benefits that the employees will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.

In Sony Mobile Communications most of the companies have defined contribution plans and therefore no pension provisions on the balance sheet. The subsidiaries in Japan, Netherlands, Germany, UK and Mexico have defined benefit plans. In Sweden, the total pension benefits are accounted as defined contribution plans, even though the Financial Accounting Standards Council’s interpretations committee defined the ITP pension plan, financed through insurance with Alecta as a defined benefit plan. Alecta can, however, not provide the information required for the accounting of a defined benefit plan.

 

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Pension costs

 

2011

   Sweden      Netherlands     Japan      UK      Other      Total  

Pension cost Defined Benefit Plan

             (159     7,819         10,211         1,354         19,225   

Pension cost Defined Contribution Plan

     27,307         218                159         10,021         37,705   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

     27,307         59        7,819         10,370         11,375         56,930   

2010

   Sweden      Netherlands     Japan      UK      Other      Total  

Pension cost Defined Benefit Plan

             (4,360     9,176                 168         4,984   

Pension cost Defined Contribution Plan

     29,289         592                821         10,213         40,915   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

     29,289         (3,768     9,176         821         10,381         45,899   

Provisions for post-employment benefits

 

2011

   Sweden      Netherlands      Japan      UK      Other      Total  

Provision for post employee benefits

             726         20,024         9,992         4,020         34,762   

Other employee benefits

                                     937         937   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

             726         20,024         9,992         4,957         35,699   

2010

   Sweden      Netherlands      Japan      UK      Other      Total  

Provision for post employee benefits

             883         19,301                 3,294         23,478   

Other employee benefits

                                     988         988   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

             883         19,301                 4,282         24,466   

The change in the UK is related a pension plan that could not previously be accounted for as a defined benefit plan, due to that the information needed was not available.

C17.    Long-term liabilities

Maturity dates for the group long-term liabilities, TEUR 8,649 (TEUR 107,838), are within 1-5 years.

C18.    Other current liabilities

 

     2011      2010  

Accrued personnel related expenses

     100,503         112,849   

Accrued sales related expenses

     323,402         485,634   

Other accrued expenses

     177,221         182,624   

Other short term liabilities

     155,386         164,410   
  

 

 

    

 

 

 

Total

     756,512         945,517   

Accrued sales related expenses include sales bonuses, such as quarterly and yearly bonuses, quality bonus, co-op and stock protection.

 

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C19.    Assets pledged as collateral

 

     2011      2010  

Liabilities to financial institutions

     

Bank deposits

     160           

Other

             27   
  

 

 

    

 

 

 

Total

     160         27   

C20.     Contingent liabilities

 

     2011      2010  

Other contingent liabilities

     8,383         3,603   
  

 

 

    

 

 

 

Total

     8,383         3,603   

Other contingent liabilities mainly include guarantees for loans.

C21.     Adjustments to reconcile net income to cash

 

     2011     2010     2009  

Deferred tax

     (224,852     (31,331     (267,645

Minority interest

     23,127        8,508        28,720   

Interest

     597        2,102        960   

Tax

     110,034        41,255        (35,737

Change in provisions (note C14 & C16)

     (82,582     (256,612     32,747   

Write-down on non-current assets

     118        2,578        17,376   

Gains and losses on disposal of non-current assets

     (96     (4,731     376   

Other

     42,758        6,704        5,375   
  

 

 

   

 

 

   

 

 

 

Total

     (130,896     (231,527     (217,828

C22.     Leasing

 

     2011      2010      2009  

Leasing costs

     56,397         65,416         72,868   

Future payments for operating leases and rents

 

2012

     52,312   

2013

     45,027   

2014

     35,319   

2015

     29,163   

2016

     25,230   

2016 and future

     36,352   

The purpose of leases mainly refers to rents and office equipment.

 

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C23.    Wages, salaries and social security expenses

Wages and salaries

 

     2011      2010      2009  

Wages and salaries

     454,927         432,718         532,905   

Social security expenses

     143,169         124,898         133,504   

Of which pension costs

     57,253         45,899         44,988   

Of which

        

CO compensation

     1,755         1,571         1,433   

CO pension costs

     1,013         263         115   

bonus & similar to CO

     276         761         42   

Severance pay

For the President and the Corporate Management the following applies:

Severance payments are not payable if an employee resigns voluntarily, or if the employment is terminated as a result of flagrant disregard of responsibilities. An exception to this is if the notice of termination given by the employee is due directly to significant structural changes or other events that affect the content of work or the condition of the position. In such an instance, the notice is treated as if it were given by the Company and severance payments are made to the individual. Upon termination of employment, severance pay amounting to one years’ salary is normally paid. The severance payments will be paid out during agreed severance period.

Pension

Sony Mobile Communications’ policy regarding pension is to follow the competitive practice in the home country of the executive. There are different supplementary pension plans for the President and the Corporate Management. As major pension arrangements, the total pension base salary consists of the annual base salary and the target pay out according to the short term incentive plan.

Long term incentive

Sony Mobile Communications has a long term incentive program for certain employees. The calculation of the long term incentives is based on the performance of the Group and payments for the units allocated are vested in three years. The size of the units is approved by the Shareholders’ Remuneration Advisory Group.

Number of employees

 

     2011      2010      2009  
     Men      Women      Men      Women      Men      Women  

Europe * and

                 

Middle East & Africa

     2,285         887         2,600         1,025         3,067         1,234   

Americas

     328         113         413         140         547         180   

Asia Pacific

     3,250         2,592         2,780         2,201         2,985         2,252   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5,863         3,592         5,793         3,366         6,599         3,665   

* Of which Sweden

     1,892         671         2,147         791         2,438         930   

* Of which EU excl. Sweden

     295         148         289         143         425         184   

 

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Distribution of female/male for the Board of Directors and other persons in leading positions

 

     2011     2010     2009  
     Number on
balance day
     whereof
men
    Number on
balance day
     whereof
men
    Number on
balance day
     whereof
men
 

Consolidated (including subsidiaries)

               

Members of the board

     90         95.6     87         96.6     95         97.9

Presidents and Executive Vice presidents

     17         94.0     15         100.0     15         100.0

C24.    Fees to auditors

 

     2011      2010      2009  

PwC

        

Audit fees

     1,565         1,668         1,427   

Fees for audit services besides the audit assignment

     27                   

Fees for tax services

     181         102         267   

Fees for other services

     237         182         416   
  

 

 

    

 

 

    

 

 

 

Total

     2,010         1,952         2,110   

The amount for audit fees to other than PwC is TEUR 251 (TEUR 212).

C25.    Financial risks

Foreign exchange risk — Transaction exposure

Sony Mobile Communications’ results are presented in EUR, which is the functional currency for the group that exposures are hedged against. The main part of the net exposure is concentrated to the holding company. However, the group has sales and cost of sales in a large number of currencies. Approximately 81% of the group’s net exposure is made up of USD, JPY, GBP and SEK.

The group’s currency exposure is hedged up to 8 months using primarily forward contracts. The market value of derivatives not recycled to the Income Statement but booked as Other Comprehensive Income under equity by December 31, 2011 was EUR 26.7 millions, all of these derivatives were forward contracts.

Foreign exchange risk — Translation exposure

All equity in the group’s companies is translated in accordance with the “current method” hence the translation exposure is taken directly to equity in the balance sheet. This type of currency exposure is not hedged.

Interest rate risk

Sony Mobile Communications’ interest rate risk is primarily derived from cash, borrowing and short term deposits. Other balance sheet items are to a very small extent affected by shifts in the interest rate. Cash and short-term deposits, with an investment horizon shorter than twelve months, amounted to EUR 442 million at year end 2011. Short term borrowing amounted to EUR 742 million.

Credit risk

Credit risk is divided into two categories: credit risk in account receivables and financial credit risk.

 

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Credit risk in account receivables

The total value of outstanding accounts receivables were at year end EUR 692 million. Provisions for expected losses at year end were EUR 10.8 million. Account receivables trade toward countries with a country risk in the interval negligible to moderate, 1-2 on a scale of 4, amounted to 67%. Sony Mobile Communications applies insurance to a great extent, approximately 68% of the outstanding accounts receivables trade are insured against non-payment by the customer.

Financial credit risk

Financial instruments carry an element of risk in that counterparts may be unable to fulfill their payment obligations. These exposures arise in the investments of cash and cash equivalents and from derivative positions with positive unrealized result against banks and other counterparties. Sony Mobile Communications mitigates a major part of these risks by investing cash in governmental risk with high rating. Part of the liquidity is also deposited with a few chosen banks with the highest possible short-term rating. How much to be invested with each fund and bank is regulated in policy.

Liquidity risk

The liquidity risk is that Sony Mobile Communications is unable to meet its short term payment obligations due to insufficient or illiquid cash reserves. At year end Sony Mobile Communications’ cash was split between bank deposits of EUR 172 million and investments in liquid funds of EUR 270 million.

C26.    Liabilities to financial institutions

 

     2011      2010  

Liabilities to financial institutions, non-current

             100,000   

Liabilities to financial institutions, current

     745,427         133,081   
  

 

 

    

 

 

 
     745,427         233,081   

The external borrowing increased during the year by Euro 512 million (excluding accrued interest) with an outstanding debt at the end December of Euro 742 million. The cash flow from operating activities for 2011 was negative Euro 538 million.

In 2011 Sony Mobile Communications secured additional external funding of Euro 300 million, all of which is utilized at the balance sheet date. The parent companies guaranteed Euro 350 million of the bank facilities on a 50/50 basis.

 

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C27.    Group companies

 

Company

   Domicile      Percentage of
ownership
 

Beijing SE Potevio Mobile Communications Company Ltd. (BMC)

     China         51

Beijing Suohong Electronics Co. Ltd., (BSE)

     China         100

LLC Sony Ericsson Mobile Communications Rus

     Russia         100

Sony Ericsson Hungary Mobile Communications Ltd.

     Hungary         100

Sony Mobile Communications S.A. de C.V.

     Mexico         100

Sony Mobile Communications (China) Co., Ltd.

     China         100

Sony Mobile Communications (India) Private Limited

     India         100

Sony Mobile Communications (Thailand) Co., Limited

     Thailand         100

Sony Mobile Communications (USA) Inc.

     US         100

Sony Mobile Communications do Brazil Ltd.

     Brazil         100

Sony Ericsson Mobile Communications Hellas S.A.

     Greece         100

Sony Ericsson Mobile Communications Iberia, S.L.

     Spain         100

Sony Mobile Communications Indonesia Ltd.

     Indonesia         100

Sony Mobile Communications International AB

     Sweden         100

Sony Mobile Communications Japan Inc.

     Japan         100

Sony Mobile Communications Management Ltd

     UK         100

Sony Ericsson Mobile Communications Nigeria Limited

     Nigeria         100

Sony Mobile Communications S.p.A., Italy

     Italy         100

Sony Servicios Moviles, S.A. de C.V

     Mexico         100

C28.    Post-closing events

Losses in the parent company (Sony Mobile Communications AB) have continued after the year end closing, resulting in the parent company having negative equity. As a result, Sony has issued a capital cover guarantee.

Subsequent to year end, Sony Mobile Communications recorded a valuation allowance on a deferred tax asset in the Brazilian subsidiary as a result of a revised budget.

C29.    Reconciliation to accounting principles generally accepted in the United States

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Sweden for unlisted companies, applying the Swedish Annual Accounts Act (ÅRL), the Swedish Accounting Standards Board’s (Bokföringsnämnden, BFN) recommendations and the Recommendation of the Swedish Financial Accounting Standards Council, (RR29), Remunerations to employees, which differs in certain significant respects from the generally accepted accounting principles in the United States (“US GAAP”). Sony Mobile Communications has reconciled its net income / loss and equity under Swedish GAAP to the accounting principles according to generally accepted principles in the United States.

The principle differences between Swedish GAAP and US GAAP that affect our net income, as well as our stockholders equity relate to the treatment of business combinations (negative goodwill), synthetic option plan, restructuring costs and income tax.

 

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Business combinations — Negative Goodwill

Under both Swedish GAAP and US GAAP, when the fair value of net assets acquired exceeds total purchase price, the Company first assesses whether all acquired assets and assumed liabilities have been properly identified and valued. Under Swedish GAAP, negative goodwill is not subject to amortization and any excess remaining after reassessment is recognized in income statement immediately. During 2004, a negative goodwill amounted to TEUR 3,717 was identified by the Company in connection with the acquisition of Beijing SE Potevio Mobile Communications Co. Ltd (BMC), and it was recognized in income statement by the end of 2004.

Under US GAAP at the time of the acquisition, the Company must first reassess whether all acquired assets and assumed liabilities have been identified and properly valued. If an amount of negative goodwill still results after this reassessment, all acquired assets (including research and development assets) are then subject to pro rata reduction, except for (1) financial assets other than investments accounted for by the equity method, (2) assets to be disposed of by sale, (3) deferred taxes, (4) prepaid assets relating to pension and other postretirement benefit plans, and (5) any other current assets. If all eligible assets are reduced to zero and an amount of negative goodwill still remains, the remaining unallocated negative goodwill must be recognized immediately as an extraordinary gain. The remaining difference between Swedish GAAP and US GAAP as of December 31, 2009 was nil.

Provision for social security cost on synthetic option plan

Under Swedish GAAP, the Company accrues social security costs for the synthetic option plan during the vesting period. Under US GAAP, no social security cost is recorded until the options are exercised or matching of the options takes place, which increases net income by TEUR 228 in 2009. The synthetic options are all exercised and matched and the remaining difference between Swedish GAAP and US GAAP as of December 31, 2009 was nil.

Restructuring costs

Under Swedish GAAP a provision for severance pay is recognized when a constructive obligation to restructure arises which requires that a detailed formal plan has been communicated to those affected by it. The implementation needs to be planned to begin as soon as possible and to be completed in a timeframe that makes significant changes to the plan unlikely. Under US GAAP provisions for severance pay representing a one-time benefit is recognized over the remaining service period, if extended service period is required, when a company has a detailed formal plan which has been communicated to those affected. If an entity under Swedish GAAP has a contract that is onerous, the present obligation under the contract shall be recognized and measured as a provision. Under US GAAP, costs to terminate a contract before the end of its term should be recognized as a liability and measured at fair value when the entity terminates the contract in accordance with the contract terms or when the premises have been vacated. A liability for costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity should be recognized and measured at its fair value when the entity ceases to use the right conveyed by the contract. Sony Mobile Communications has identified a difference between US GAAP and Swedish GAAP of TEUR 15,905 (TEUR 3,742) related to leasehold property that has not yet been terminated or vacated and thus not qualified as provisions in accordance with US GAAP.

Post-employment benefits

To calculate the annual expenses for the defined benefit plans, Sony Mobile Communications uses the corridor method. The amount recognized in the income statement which is the difference to US GAAP is not material.

 

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Deferred Income Taxes

Deferred tax is calculated on US GAAP adjustments and the US GAAP balance sheet disclosure reflects the gross recognition of deferred tax assets and liabilities.

Valuation allowance

The income tax accounting guidance under US GAAP requires a valuation allowance to be applied to a deferred tax asset if realization of the underlying future tax benefits is not more likely than not. Under US GAAP, forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. In those circumstances, US GAAP provides that the weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified.

Sony Mobile Communications AB is in a three year cumulative loss position. There is however positive evidence as well: Sony Mobile Communications AB has never had any losses or tax credits expiring unused, the loss carry forward period in Sweden is unlimited, prior to 2008, Sony Mobile Communications had a strong history of a number of years with profits and management’s financial projections support the future realization of the net deferred tax assets.

Management has concluded under US GAAP, that Sony Mobile Communications AB’s deferred tax assets cannot be considered more likely than not to be realized in the future years.

Under Swedish GAAP more emphasis has been put on the fact that the loss carry forward period in Sweden is unlimited and that the financial projections, made by management, support the future realization of the net deferred tax assets and less emphasis is placed on the recent cumulative loss position. Although management expects positive impact on future earnings capacity when becoming a fully owned Sony subsidiary, it would not be enough to overcome the negative evidence under US GAAP.

Management has concluded, under Swedish GAAP, that Sony Mobile Communications AB’s deferred tax assets are probable to be utilized in the future years.

Non-current and current assets

Swedish GAAP requires deferred tax assets to be classified as non-current assets on the balance sheet. Under US GAAP, deferred tax liabilities and assets are classified as current or non-current based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carry forwards, shall be classified according to the expected reversal date of the temporary difference. The balance sheet shows a difference in non-current and current assets between Swedish GAAP and US GAAP which relates to the classification of deferred tax assets.

Adjustment of net income, comprehensive income, equity and balance sheet items

Application of US GAAP as described above would have had the following effects on consolidated net income.

 

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SONY MOBILE COMMUNICATIONS

 

Adjustment of Net Income

 

     2011     2010     2009  

Net income per Swedish GAAP

     (247,160     90,468        (835,827
  

 

 

   

 

 

   

 

 

 

US GAAP adjustments before taxes:

      

Business Combination

                   763   

Synthetic Option Plan

                   228   

Restructuring

     12,163        (9,131     (2,624

Tax effect of US GAAP adjustment

     (5,287     2,412        595   

Valuation allowance

     (653,516              
  

 

 

   

 

 

   

 

 

 

Net income in accordance with US GAAP

     (893,801     83,749        (836,865
  

 

 

   

 

 

   

 

 

 

Adjustments of stockholders’ equity

Adjustments of stockholders’ equity

 

     2011     2010  

Equity as reported per Swedish GAAP

     309,310        531,725   
  

 

 

   

 

 

 

US GAAP adjustments before taxes:

    

Restructuring

     15,905        3,742   

Deferred tax effect of US GAAP adjustment

     (6,167     (880

Valuation allowance

     (653,516       
  

 

 

   

 

 

 

Stockholders’ equity in accordance with US GAAP

     (334,468     534,587   
  

 

 

   

 

 

 

Minority interest

     58,098        42,286   
  

 

 

   

 

 

 

Total equity in accordance with US GAAP

     (276,370     576,873   
  

 

 

   

 

 

 

Comprehensive income

 

     2011     2010     2009  

Net income in accordance with US GAAP

     (893,801     83,749        (836,865
  

 

 

   

 

 

   

 

 

 

Other comprehensive income

      

Gain/loss on cash flow hedges

     9,070        11,373        1,409   

Translation adjustment

     (34,586     52,290        (1,409

Deferred tax

     (2,448     (2,935     (355

Total other comprehensive income

     (27,964     60,728        (355
  

 

 

   

 

 

   

 

 

 

Comprehensive income in accordance with US GAAP

     (921,765     144,478        (837,220
  

 

 

   

 

 

   

 

 

 

 

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SONY MOBILE COMMUNICATIONS

 

Balance sheet items according to Swedish GAAP and US GAAP

 

     Swedish GAAP      US GAAP  
     Dec. 31
2011
     Dec. 31
2010
     Dec. 31
2011
    Dec. 31
2010
 

Non-current assets

     1,122,002         803,413         316,080        550,377   

Current assets

     1,960,636         2,196,036         2,106,874        2,448,191   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets

     3,082,638         2,999,449         2,422,954        2,998,569   
  

 

 

    

 

 

    

 

 

   

 

 

 

Stockholders equity

     309,310         531,725         (334,468     534,587   

Minority interest

     58,098         42,286         58,098        42,286   

Provisions

     485,056         415,836         469,151        412,094   

Non-current liabilities

     8,649         107,838         8,649        107,838   

Current liabilities

     2,221,524         1,901,764         2,221,524        1,901,764   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholders’ equity and liabilities

     3,082,638         2,999,449         2,422,955        2,998,569   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Report of Independent Auditors

To the Shareholder of Sony Mobile Communications AB:

We have audited the accompanying consolidated balance sheets of Sony Mobile Communications AB and its subsidiaries (formerly known as Sony Ericsson Mobile Communication AB) as of December 31, 2011 and December 31, 2010 and the related consolidated statements of income and of cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sony Mobile Communications AB and its subsidiaries at December 31, 2011 and December 31, 2010 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in Sweden.

Accounting principles generally accepted in Sweden vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note C29 to the consolidated financial statements.

 

/s/ PricewaterhouseCoopers AB

Malmo, Sweden

June 15, 2012

 

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Table of Contents
Item 19. Exhibits

Documents filed as exhibits to this annual report:

 

12.1

   302 Certification

12.2

   302 Certification

13.1

   906 Certification

15.1(a)

   Consent of PricewaterhouseCoopers Aarata

101

   Interactive Data Files (XBRL-related documents)


Table of Contents

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant hereby certifies that it meets all of the requirements for filing on Form 20-F/A and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

SONY CORPORATION

(Registrant)

By:

 

/s/ MASARU KATO

 

(Signature)

 

Masaru Kato

  Executive Vice President and Chief Financial Officer

Date: July 20, 2012